Karen rolled over unrealized losses into assignments, indefinitely. She had something like $70MM in unrealized losses and was paid on realized gains. He fee structure was predicated thusly.
Casinos steal if you win big. They are clever about it, sometimes blunt, but one way or another you are not leaving with that cash.
Just to be clear, Karen was not trading that portfolio during 2008 meltdown. If she had, the fund would have blown up sooner. When the markets crashed in 1987 and 2008, the brokers increased the margin required to hold naked positions and squeezed all the short sellers out for massive losses. There were not hoards of short premium sellers rolling positions into the next month for 50 cents of premium when the the option was down 100 dollars. The brokers were not allowing them to lock in massive losses into inverted spreads with the prospect of unlimited losses going forward. In 1987, the prices being quoted were 5 hours delayed so even if you tried to roll a position, there was no way to be able to get a quote that could be used and the market makers didn't have to make you a market unless you were horribly wrong. The brokers were liquidating you without notice vs you deciding to hang onto your positions and roll forward for the next two years... Karen is a good example of what does happen when you short premium and roll it forward into perpetuity with enough capital to avoid the account from being closed. After paying fees, either to Karen or others, the fund bleeds continuously and the losses simply accumulate (hidden on the books as open positions )larger over time. It begs the question, if options are really overpriced and Karen only took out $10 million in fees to buy pineapples for farmers in Africa, how did they end up losing $70m on $165m over 5 years? It seems that options are either not as overpriced as people think or the cost of execution/commissions is so bad, that it makes it impossible to make money even when options are overpriced... I'm excluding the outliers group who manage to avoid those tail events and make a profit over a year selling premium.
If you are clever enough to know how to manage money in a Casino and walk away with too much cash, they put you on the black list and you cant go back and take more money.
Karen the 'super trader' is no different from all professsional money managers-dumb luck (QE) has saved all of them. Money printing in Dubya's era saved them,and ongoing it is the inflows of dumb money that save them. Very very few professional money managers are capable of making money- a chimp throwing darts at lists of stocks has proven more effective. Most of them do not even use or understand options, so pricing is left to the smarter people who are able to cream off profits from the dumb money who occasionally have a foray into options.
So, if I were Karen shorting puts, I would turn around and buy puts against my positions? Wouldn't that locked in my losses?
Her strategy is equivalent of selling premium and effectively being directional until the market comes back. But if she decides to sell premium into inverted spreads, she locks in big losses. As Long as she rolls forward, she can collect big bonuses on realised gains and ignore the losses for her pay. How hard is that? Anyway she will do jail time.