Watched her tastytrade interview after reading about her elsewhere...it's kind of scary really, she's like optioncoach on steroids. If you don't know, optioncoach is a guy who had a lengthy thread on elitetrader about iron condors from like 2004 to 2007. It had a, "if he can do it, I can too" vibe. But put that in the new social media age and, bam, you have this lady that looks like my mom managing $196 million, short volatility and not batting an eyelid while wearing purple pajamas. Optioncoach had a flock of beliebers ('baby, baby, baby, ohhhh, I thought low vola would always be mine, mine'), but they all disappeared after volatility reared its head in '08. It makes me think VIX is due for 40 minimum....otherwise, it won't be long before Karen the Supertrader is going to be on Closing Bell with Kelly Evans. Can that happen? full disclosure: I'm usually net short volatility myself, so now I feel like my results might as well be like getting low down-payment mortgage offers in the housing boom....everybody was
Selling volatility is like selling drugs. It's easy money while the going is good and it's so damn hard to quit when the money just keeps rolling in.
http://www.youtube.com/watch?v=BquDGE9KxZQ Karen sells Theta not volatility. She sees volatility as a complication. Her pajamas look red to me, not purple.
That is what the interesting thing is in listening to her earlier interviews. In one of them she made a comment that there were times when she was looking at the price of tickets to south america due to the drawdown she was facing. Also, I picked up that she was trading condors (not the naked strangles she does now) and a lot smaller in 2008. I trade primarily theta and volatility assumptions as well. However, I was sitting at my screen during the flash crash and I can tell you that having the mindset of "I will just close out my short if it hits a 30 delta" is not sustainable. I know probabilities are with you but in my mind not hedging for that just in case scenario makes no sense. Probably why I am not managing 195million, but if it was other people's money maybe I would be more aggressive. That being said, she adjusted her trading to manage the one way market last year and she still returned 2.2% for January which did have a pick up in volatility.
She said 2011 was a good year for her, and VIX did get in the 40's. So, honestly this makes me think all the short vola guys are being setup for.....jump risk. :eek: No, seriously, the guys that made a killing with iron condors in the mid 2000's probably didn't see VIX getting into the 80's coming, it just didn't seem like a possibility. For this round of retail short volatility guys, including myself, we can envision a scenario where VIX goes to the moon because we watched 2008 first hand. Therefore, the risk is probably something we don't see, like jump risk. Market closures, no chance to hedge, weekend events that make the Sunday opens +/- 200 ES points. It's one reason I prefer volatility in currencies, there's not that market closure risk.....I think. Unless Deutsche, Citi, and the other big forex houses close up shop along with the markets. In that case, I guess you can only hope your wing options save you.
Average realized vol on the S&P since Jan 1990, the first period for which you can get history for the VIX, equals 15.77, with a median of 13.44. So you could use those as your reference points for where realized vol will tend to mean revert. But if you just download everything back to 1950 for the S&P, and run realized vol on that, the average is 13.34 with a median of 11.5. The recent period had two big drops coming very close to each other: the dot com bust and then the 2008 crisis. Not really typical. That doesn't mean we won't get another one soon or anything like that, just that we may all be suffering from PTSD and not know it, in which case Karen will continue to do very well.
It isn't the average volatility that I worry about, it is the extremes along the way. I heard her compare what she does to sitting at a blackjack table with odds 95% in your favor. The problem I have with that comparison is that all outcomes are known in blackjack. Add in the chance that the casino gets robbed and you lose all your money, then would you still play like that? I think you are right, I may be one of those suffering from PTSD based on things I have seen over the last 10-15 years in the markets. There is always that "what if" in the back of my mind. That being said, I found her interviews very interesting and the takeaway is that she found what worked for her and went for it.
You need such a huge amount of capital to do what she's doing, even in tiny lot size - no way I could ever do this. She's doing "nekkid" options on SPX - up to 1000 lots - that's like over $150M capital requirements - WOW! A Black Swan event would knock her out. But, she started out with covered calls then iron condors - now that, I can do.