Karen the SuperTrader’s Strategy and Downfall Explained
Karen the SuperTrader was a popular figure in the trading world, who claimed to have a winning strategy that generated consistent returns by selling options on the S&P 500 index.
However, her hedge fund was accused of fraud by the SEC, and she lost millions of dollars in the process.
Who is Karen the SuperTrader?
Karen Bruton, also known as Karen the SuperTrader, is a Nashville-based hedge fund manager who founded Hope Advisors in 2011. She gained fame after appearing on tastylive, an online financial network, where she shared her option trading strategy and claimed to have never had a losing month.
She also claimed to have turned $100,000 into $41 million in five years. She attracted many investors who were impressed by her performance and wanted to join her hedge fund.
What is Karen the SuperTrader’s Hedge Fund Strategy?
Karen the SuperTrader’s hedge fund strategy was based on selling strangles around 56 days to expiration (DTE) on the S&P 500 index (SPX). A strangle is an option strategy that involves selling a call and a put with different strike prices but the same expiration date.
The idea is to collect premium from both sides and profit if the underlying price stays within a certain range until expiration. Karen the SuperTrader would sell strangles when implied volatility (IV) was high, which means that the option prices were inflated and she could collect more premium.
She would also adjust her strikes according to the market conditions and delta, which is a measure of how much an option price changes with respect to the underlying price.
However, Karen the SuperTrader had a risky way of managing her trades. She never used stop losses and would simply roll the contracts forward if they went against her.
Rolling means closing the current position and opening a new one with a different expiration date and/or strike price. By rolling for a credit, which means receiving more money than paying out, Karen the SuperTrader was able to defer her losses into future periods and avoid realizing them in the current period. This way, she could maintain a positive balance in her account and continue generating incentive fees from her investors.
However, this strategy was not as profitable as it seemed. In fact, Karen the SuperTrader was committing fraud to continue generating incentive fees from her investors.
How Karen the SuperTrader Commited Fraud
Karen the SuperTrader did not achieve her consistent returns by using a clever strategy, but by using a more common and dishonest method: fraud. The U.S. Securities and Exchange Commission (SEC) accused Karen Bruton and her Hope Advisors of engaging in a pattern of deceptive trades so they could continue earning large incentive fees from their investors.
According to the SEC complaint filed in federal court in Atlanta in 2016, Hope Advisors had two hedge funds: Hope Investments LLC and HDB Investments LLC. Both funds had a high-water mark provision, which means that Hope Advisors would only receive incentive fees if the funds’ net asset value (NAV) at the end of each month exceeded their previous highest NAV.
This provision was meant to align the interests of Hope Advisors and its investors, and to prevent Hope Advisors from receiving incentive fees for poor performance.
However, Hope Advisors violated this provision by manipulating its NAV through fraudulent trades. Specifically, Hope Advisors would enter into large options trades near the end of each month that had no economic purpose other than to artificially inflate its NAV.
These trades involved buying deep in-the-money options that had very little time value and selling out-of-the-money options that had more time value.
By doing so, Hope Advisors would receive a large credit that would boost its NAV, but also incur a large liability that would be deferred into future periods. These trades were not disclosed to or approved by the investors or the fund administrator.
By engaging in these fraudulent trades, Hope Advisors was able to receive incentive fees that it was not entitled to. The SEC estimated that Hope Advisors received at least $1.8 million in excess incentive fees from June 2014 to April 2016.
The SEC also alleged that Karen Bruton personally benefited from these fraudulent trades by receiving at least $520,000 in excess incentive fees that she used for personal expenses.
The SEC charged Hope Advisors and Karen Bruton with violating antifraud provisions of federal securities laws and sought disgorgement of ill-gotten gains plus interest and penalties.
Hope Advisors and Karen Bruton consented to the SEC order without admitting or denying the allegations. Hope Advisors was barred from accessing $7 million in its two hedge funds and restricted from taking any new investments from clients.
How Did Karen the SuperTrader Lose Millions?
Karen the SuperTrader’s fraudulent trades not only harmed her investors, but also exposed her to huge losses. As the market moved against her positions, she had to roll her options forward and incur more liabilities.
She also had to pay more margin requirements to maintain her positions. Eventually, her losses caught up with her and she could not roll anymore.
According to TheStreet, an online financial news site, Karen the SuperTrader lost $50 million in May 2016 alone. She also lost $100 million in August 2015, when the market experienced a sharp drop. Her hedge fund was down 40% in 2016 and 20% in 2015.
Karen the SuperTrader’s strategy of selling options and rolling them forward was flawed because it did not account for the realized losses that she incurred. When you roll options forward for a credit, you are not eliminating your losses, but only postponing them.
You are also increasing your risk exposure and reducing your profit potential. Eventually, the market will move beyond your break-even point and you will have to face the consequences.
Karen the SuperTrader Net Worth
Karen the SuperTrader’s net worth is not publicly available, but it is likely that she has lost a significant amount of money due to her fraudulent and failed trading strategy. She also had to pay back the excess incentive fees that she received from her investors, as well as penalties and interest imposed by the SEC.
She may also face legal action from her investors who suffered losses due to her misconduct.
It is possible that Karen the SuperTrader still has some assets left, such as her house or other investments, but it is unlikely that she has enough money to continue trading or running a hedge fund.
She may also have difficulty finding new investors or clients who would trust her after her scandal.
How to Learn More About Trading Options
If you are interested in learning more about trading options, you should not follow Karen the SuperTrader’s example. Instead, you should seek reputable sources that can teach you the fundamentals and advanced concepts of options trading, as well as provide you with practical tools and guidance.
One such source is HaiKhuu Trading, a community of traders who share their knowledge and experience with each other. HaiKhuu Trading offers daily morning reports, live voice calls, and a welcoming community where you can ask questions, get feedback, and learn from other traders.
