Specific notes on Karen Super Trader options strategy
I have started the automation with source code here https://quantlabs.net/blog/2015/10/intro-to-karen-super-trader-strategy-automated-trading-system-part-1/
I need a few confirmations from others via Facebook
Karen uses Bollinger Bands which is a technical tool to find specific strike prices that are unlikely to be reached based on the current market environment.
By using this tool, Karen can find strike prices that are unlikely to be reached, to place trades that are approximately 56 days to expiration.
Uses implied volatility for:
She uses charts to measure the VXX and OTM volatility charts to find levels when implied volatility is rich or cheap. The technique Karen uses to mitigate risk is avoiding her Lick (Net Liquidating Value). The lick is applied to premium-paid upfront options cleared by an exchange.
Karen’s strategy is also short gamma which means as the market moves against her, the positions become worse at a greater rate. Karen also experiences large swings in returns, with losses of more than 4% within a month, but the upside returns have been much greater than the adverse returns.
Her method is to collect income directly from writing mostly naked options. From what I understand is that she writes naked puts near the bottom of swings and sells naked calls near the tops of swings. She used Bollinger Bands and Fib numbers for timing.
… trades the 12% out of the money puts and 10% out of the money calls. She shorts the naked options when they have a lot of implied volatility. These options are put on at the sweet spot that’s when they will have a rapid decline in premium. This time decay of premium is basically know as theta.
I think I understand how she uses the Bollinger bands. The strike prices that she puts on are at the edge or slightly out of the Bollinger Bands. See the chart below. If the position moves against her then she will put on even more, which is a double down strategy. The Bollinger Bands are set at 2-diviations on a 20-day moving average.
(see chart in above link)
Here is a chart of the SPY and this might be where she places her option trades. Selling naked puts at the bottoms and sell naked calls at the tops of the Bollinger bands. This is my estimation of what she does, but can’t be confirmed. <– who wants to confirm this?
Karen keeps her eyes on implied volatility and writes the options when volatility is rich and takes them off when it is cheap. She uses a technique to mitigate risk and to avoid her Lick (Net Liquidating Value). Lick is applied to upfront option premium-paid cleared by the exchange.
focus strictly on selling premium and using Bollinger Bands to view the standard deviations in a graphical form, preferring to put on trades outside of two standard deviations to current prices. Karen revised her strategy to focus on selling wide Index strangles in SPX, RUT and NDX.
Today, she mainly trades the S&P 500 Index (SPX), which in addition to tax advantages has commission optimization, liquidity, and size, as opposed to SPY, which she says is too expensive for her to trade cost effectively.
When volatility is high, Karen The Supertrader constantly trades, selling and collecting premium. If volatility is low, she often lets her front month positions expire worthless. For her, good volatility is when the VIX is between 18 and 20.
Karen also ladders out positions – opening positions at different expirations, and always trying to sell Calls and Puts 95% OTM (Out of The Money) or two Standard Deviations away.
For risk management is listed as well in TastyTrade.com link
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