Karen the Supertrader - TastyTrade Hybrid Experiment

Discussion in 'Journals' started by Sweet Bobby, May 18, 2016.

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  1. Did things heat up today? Did I get killed?
    #341     Jun 24, 2016
  2. Why would I feel sour with a realized profit of $3,110.50?
    #342     Jun 24, 2016
  3. Don't listen to all these haters, your an inspiration to all of us struggling option traders..I will take a size medium, I've been working out lately..keep up the great trading.
    #343     Jun 24, 2016
    Sweet Bobby likes this.
  4. Thank you! A positive comment is greatly appreciated.
    #344     Jun 24, 2016
  5. Maverick74


    I don't think these guys are sour traders. I've been doing this for 20 years, most of it in a professional capacity. Some of the other traders here as well. Experience is the greatest gift you can offer someone. The only question is will they be able to properly ascertain it's value.
    #345     Jun 24, 2016
    CBC, ironchef, wow12 and 1 other person like this.
  6. I appreciate your comment.
    #346     Jun 24, 2016
  7. NPTrader



    I do not follow Elite Trader often and I do not have a long history of posting on this forum - I spend my occasional investigation time reading and discussing with those on the Yahoo group that was started to follow Karen. My trading strategy is documented and heavily analyzed by the members there.

    I am writing to let you know that with a stronger hedging strategy, your account will be put into a stressed position, and it's likely one that you cannot get out of.

    Independent of even knowing who Karen was, I devised my own strategy that has been in evolutionary improvement over (almost) 5 years. I just looked up the results, and they were 14% for a half year in 2011, 27% in 2012, 7% in 2013, -9% in 2014, 53% in 2015, and 9.5% YTD. I trade an account that is north of 7 figures. I have these funds spread across multiple portfolio margin and IRA accounts. I trade my IRA account like it was portfolio margin by using $.05 dated long options to box any naked trades. While the mechanics are slightly different trading in an IRA account when it comes to rolling, the size of the positions and where my strikes lie are identical to what I would do in my PM account.

    I'll tell about my current strategy in a moment. But the before I do so, I want to let you know there is no way that Karen is getting the sorts of returns she is making without either:
    1. Having superb timing abilities that let her masterfully choose when puts / calls are opened, or:
    2. Having an excessive amount of risk, that is too many DTE.

    You have to model out what happens to an options position when implied volatility dramatically increases. If the market drops on you, even if you believe you can survive by adjusting your puts down / out / reduce in risk, you do not have as much margin to adjust as you might think. Presumably, if you have puts 45 DTE, you'll also have a lot of calls 45 DTE. And while you may think they are making you money, a huge drop and implied volatility can cause those calls to increase in value and require potentially a higher margin requirement. That margin requirement takes away from margin that you may need to give yourself more room on puts.

    I studied Karen's method. If you want 25% return / year, every year, trading 45 DTE, you need to have 100% of your calls & puts open all of the time - and then you would need to add enough contracts to generate that .5% gain. The sort of contract volume required to consistently get that gain will only give you a 15% downside drop before you are in oh shit territory on the edge of a margin call. There are a number of people in the Yahoo group that have experienced those moments in January this year and it other times where we had huge drops.

    Tom that a lot of the guys follow on that thread - his overall returns from trading the strategy are not that good, and there have been a couple of oh shit moments from him. I have pleaded with him for awhile to change his options strategy. His returns this year are around 25% YTD, but a lot of those returns are coming from something he likes to call delta hedging, which is just a fancy way to say that he's opening up long / short futures positions on /ES when one of his sides is unnecessarily stretched and causing losses. His setups for the futures positions are elaborate and very involved - so much so that it's hard for me to call them delta hedges, and more "opportunistic trend trading." Meaning, that he is trend trading over very short periods of times by looking at chart setups, but only putting on such trades when one of his sides are threatened. But I think his returns have been so good on that, that he is now doing more swing trading instead of the options stuff.

    I started trading my strategy after I had gotten very sick and developed it in isolation. Basic philosophies of options trading should be:
    1. Maximum theta
    2. Minimal risk
    3. Never be in danger of a margin call

    I also make the basic conclusion that markets never crash up, they move up in an orderly fashion. And this gives me a lot of confidence around selling naked calls in a very high volume. In fact in reviewing my records, about 2/3 of all contracts traded over the past 5 years are naked calls while they return 1/3 of my total profits. That is not bad considering the market has moved up in those five years, so have been making money shorting the market all the way up.

    Maximum theta happens when you are close to expiration. Also, to avoid margin calls, I ask myself how many contracts can I open to survive a 50 point increase in implied volatility, a 50% drop in the market, and a 10% rise in the market. This lets me know what my maximum number of puts and calls that can be opened. For every $1M or so being traded at 2000, this allows me to put on 10 puts, and around 50 calls.

    I trade within a few days to expiration. It used to be putting trades on a Friday for next Friday expiration. But the arrival of Wednesday weeklies a coupel months ago have helped to boost my returns so I trade 2x / week now.

    I used to try and stay OTM at any cost. I'd want to target a .4% return per week, so I'd open my puts to get .2% and my calls to get .2%. Any time my puts got within 1.5% of touching the underlying, I'd roll out and down. Same thing for the calls. And each adjustment, since I was at my maximum contract leverage, I'd reduce contracts from puts or calls. The extra cash collected and then the reduction of leverage left me with an overall higher cash position. Keep repeating until the market ended the week in the middle of my strikes and I kept all of the cash. I'd even tighten the calls and puts during the week to get a little more income. But I never wanted to let my positions go ITM - things would be a disaster, right?

    Well, in 2014 the market was screaming up, and I had my calls too tight and I couldn't adjust out and up fast enough. They were caught ITM. And that taught me valuable adjustment lessons, and realized that being ITM wasn't such a bad thing. It took me 4 months to dig out of the -9% hole that I had built for myself (and it was a 15% peak to trough drop, so brutal).
    But when I got on the other side of that mess, I realized that I was working so hard to try and stay out of the money, and you cannot avoid it. And having a lot of leverage go ITM is a dangerous place to be. And that got me thinking about what would happen if that happened on the put side. At the time I was only budgeting for a 30% drop in the market, but then reduced my puts to survive a 50% drop.

    Once I realized that my overall returns were being hurt to stay OTM and that I was being overly paranoid to go ITM, I recognized my trading strategy was suboptimal. I flipped my hat and asked myself about changing mentality. Instead of trading to avoid chaos that happens .001% of the time, instead develop a trading strategy where chaos is happening 99.999% of the time. If you trade like every day is a black swan, then when a black swan really happens, you have all of the skills needed to trade through it.

    So what I do now:
    1. I get as close to ATM as possible.
    2. I open up all of my puts right around ATM.
    3. I open up the same number of calls slightly OTM - about 2 strikes worth, just enough to absorb the 150 year average of growth since the market eventually does go up.
    4. I open up the rest of the calls on Tuesdays and Thursdays to do some call scalping to pick up additional premium, but in a structure where 99.99% of the trades should be safe.
    5. By Wed or Friday, some positions are ITM - it always happens. That is when things are bad, so they are always bad. I then have adjustment activities. Essentially I roll the ITM side to the next expiration. I then open up the OTM side full allotment at the right location. This will generate anywhere from 1-2.5% in cash. If my target is .4% (more like .6% in a single week these days), I can use the extra cash generated to move ITM calls / puts to be in their ATM posture, ultimately increasing their theta.
    6. Separately, because no one wants their puts to really drop 50% and see that happen, I do take about 1/10th of all the cash generated each week and buy batches of long puts 5 weeks out. I have about 2x more long puts in a ladder than I do short puts. These long puts cannot save me from a 10% drop at all. But if the market has a 2008 or a flash crash, it would cap my losses to around 15%.

    Since I have started traded this way more aggressively, I have had an 11% drop from peak to trough, in Jan / Feb, and it took me 8 weeks to recover back to the peak. And overall it's clearly a good year since I am up almost 10% after being down 11% just a few months ago. This week, I returned .6% on the portfolio and gained 3.5% in cash. I have calls at 2030 that were ITM from the market rise, which are now right ATM, and most of my puts were opened up last week at 2100 when the market was peaking. But I did the smart thing and rolled everything out to this wednesday last Thursday because the premium was so juicy. I had no idea which way the market would land, so I just opted to keep all the premium collected and if one of my call / put sides are breached, I'll start adjusting. I'll start moving puts from now being deep ITM to ATM.

    Safe trading to you - listen to people on this forum. Don't blow up your account. And learn how to trade entirely ITM. Find ways to get yourself out of any possible naked call / naked put ITM scenario. I have a trading plan for every possible outcome, even a Black Monday, a flash crash, or another QE that causes the market to rise 5%. I may take some portfolio losses along the way, but I always recover, always collect more premium, and eventually start showing gains.
    #347     Jun 25, 2016
    TrustyJules, tman, Pekelo and 4 others like this.
  8. Your whole post, while very informative and helpful, the method seems hard and too complicated. Just short SPXU and some TMV. 30 to 50 percent annual returns. Selling calls can be very nerve racking because you get very little margin of error due to the bias of the skew, whereas put options have a much deeper skew and more room to be wrong. Call premiums are so small
    #348     Jun 26, 2016
  9. F_488


    The UK is in complete chaos at the moment with the Labour Party imploding now plus the remain politicians stating Armageddon is happening. Volatile week ahead.
    #349     Jun 26, 2016
  10. NPTrader


    The skew is not a problem for me because I do not mind going itm and am able to extract the theta that is needed even if itm with losses. My expectation for future years is around 28 percent return gain per year. The nature of this trading has a tax advantage as they are treated as 60 percent long term capital gains.
    #350     Jun 26, 2016
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