Since I posted about Super trader Karen's option selling strategy, I have received a couple of anonymous comments questioning about her strategy and trading performance. Other on-line trading forums have a lot more critics of the trading performance of Karen, the super trader. So I'd like to share my 2 cents as well. Please note I'm not affiliated with Tom or Karen. They don't know me at all, at this time of my writing.
I was educated by Investools (same stock/option education company that Karen attended) and by TOS (founded by Tom) in option trading. I happened to attend a few seminars presented by Tom, the interviewer of the Karen. Thus, I believe Tom is a successful and honest businessman. So it's hard for me to believe he would lie about his client (Karen) in TOS. In my humble opinion, there is no dispute among option traders that selling option premium is the most consistent way to profit on stock option trades. Karen's option selling strategy appears to be sound and logical for me. [Update: I'd like to stress that the system and the rules disclosed in the interviews should be far more important than the phenomenal profits for traders who are process-focused.]
A lot of people know solid option trading strategies as they are taught by many education experts but only very few limited numbers of them actually make money for living using these strategies. I think Karen is one of the successful option traders who made millions of dollars. Her trading performance in the time frame discussed in the interview video was exceptional, as Tom stated in the interview repeatedly. It's so exceptional that Tom and other option education experts could not achieve. It also means all other traders are not likely to achieve unless they become really exceptional too. Exceptional also suggests the excellent performance may not last forever. Since Karen's strategy involves probability, I believe it's possible to calculate the expected rate of return in estimation. Anyone who can keep the rate of return should be considered as a successful trader of this strategy. This should be the target many of us trying to reach.
To make a good judgement about this option strategy and its potential performance, traders must understand its principles first. Many of the critics online do not provide enough substances in their comments. But I still like any critics about the strategy itself and its published rules. Otherwise, I suggest to put accusations in other on-line forums.
Charles, I found your site searching for info about Karen and her trading methods. I think her story is real.
ReplyDeleteThe one thing about her trading that doesn't add up is her comment that she doesn't do anything with a trade until it gets to a .3 delta. If she is selling (to open) at -.05 on the put side and waiting until it hits -.3 before making an adjustment, she is going to be a lot more underwater than the additional margin she has set aside.
I realize she is using Portfolio Margin and I would also assume that she doesn't have all her capital tied up in one position at a time. She says she is trading the RUT, SPX and I believe there was a least one other. Let's further assume that she diversifies her trades by the different instruments she trades. Her instruments are all HIGHLY CORRELATED of course, but let's ignore that fact for a moment. So, one of her 3 trades would require 1/3 of her capital and she would only commit 1/2 of that (1/6 of her capital) for the margin requirement. If one of her 3 trades began to get challenged and its delta rose/fell to .3, she would have not only the other 1/6 of her capital dedicated to this trade she would have excess capital from the other trades to help, if necessary assuming they weren't similarly challenged (which they probably were).
As an example, as of 12/27/13, the SPX Feb14 1610 Put has a 5% Prob ITM and a last price of $2.70. If one assumes that an option was held for 30 days and then became challenged and its delta rose to .3 and Prob ITM of around 30%, the option price is going to be 4 to 20 times the opening price. A SPX Jan14 1815 Put has a 30% Prob ITM and its last price was $8.70 and that is when the market trend is up. If a Put position was under pressure and the trend was down, the IV would be higher and the Put prices would be even higher.
So, clearly, she has to start managing her winners LONG before it hits a 30 delta.
Your thoughts?
Great comments. It's my impression that the 30% number was given as an example by the interviewer Tom. It's not as affirmative as the other numbers (5%/10%).
DeleteI have seen other option premium sellers starting to adjust if losses approach twice as much as the targeted profits. One can use statistics to calculate the overall returns in estimation to reach a comfortable risk/reward ratio for such a trading system.
Thanks
Charles
BTW, we have started a Super trader Karen study group, please feel free to contact me if you are interested in this strategy.
Yes, I would like to join your study group. How do I contact you?
DeletePlease contact me at smoothprofitoptions at Hotmail dot com.
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