Besides, one shouldn't look to just maximize probability, but instead maximize payoff. Payoff is probability*(reward/risk). Selling an option with a 95% probability of finishing OTM but only credits you 0.06 is ridiculous.
(a) What she's doing can be thought of as a regulatory arbitrage. Used to be that market-makers and banks were happy sellers of low downside in equitiy options, but after large losses in 2010 and 2011 most places clamped down on that practice. Also, with the aggressive consolidation in the hedge fund community (who are becoming more and more like the asset managers, again, due to regulatory pressures), there are very few sellers of crash risk there too. (b) The expectation on these strategies is positive, you can convince yourself of it via simple historical analysis. The yields, assuming reasonable margin structure, are pretty good too. However, whoever is selling these tails is willing to accept a very unpleasant P&L profile with large drawdowns. The main risk on these strategies in not really jump risk, but rather margin risk - it's not likeley you going to see any of the options pay off, but it's possible that you see the margin double or even tripple during the life of the trade due to vega and cross-effects. (c) With institutional regulations getting tighter and tighter, these strategies will probably continute to improve, rather then lose edge. For example, the new Basel III regulations force the banks to have a down 35% general market limit. Retail, with all Karens of the world, is unlikely to make any serious dent in the demand for tail hedges from a trillion-dollar institutional community.
Not sure if that is the right logic. 95% probability is imputed from delta, which is calculated from the market implied vol. What you are actually trading in this situation is the market-implied probability against some predicted probability.
Having been one of the "followers" I'd clarify that OC did NOT advocate IC's. His journal was SPX Credit Spread Trader. Basically selling OTM...pretty far OTM...credit spreads with some technical bias. He did at times morph the trade into an IC. It was an interesting learning experience for those that followed along. He moved on as did we all when vol changed. He never solicited nor did he make claims that this could be done for "regular" income like others who have come and gone. I consider him a good guy and not a "guru". You place your bets on volatility and direction and you use tools your comfortable with to put them on and take them off. Is Karen a blow up waiting to happen.....who knows...
I think in her various interviews, Karen has only discussed trading record since Jan 2009, and then admits to only 1 losing month up to Jan 2014. In order to generate stated annual returns of 30-40% by selling 5 delta puts, she is maxing out on margin .... ..... and as Tom Sosnoff clearly says; despite the fact that he has a healthy appetite for risk, she has considerably bigger cohones than he has and he has not / would not invest in her fund. I suspect that unless she changes trading style / capital allocation, then she may get carried out on her shield if there is a 50% market fall as 2008. Cheers James
I dont get all the criticisms of her trading. bottom line is, shes been profitable. if she can do it so can we. yes black swan events can happen, but those are extreme outliers. If you carry that mentality, you might as not trade or go out or do whatever it is you do on a regular basis due to the inherent small chance that something will go wrong. granted, shes been trading im.a bull market, her current strat is profitable for current market situations. once a bear hits, you adjust your strategy as necessary. isnt that the whole point of options? to add flexibility outside of buying and holding or shorting stocks?
Perhaps she has learned to Hedge better, Yes the ES could Gap down 200 points when we find out why all of these bankers are "committing" suicide...but if she exits her position and tries to let her Hedges run as long as possible, its possible that she would not get crushed that bad, Not enough to lose more then she has planned for.