‘The Supertrader’s SEC Complaint Fascinates Options Traders. Risk Management Lessons Abound

The Securities and Exchange Commission’s Complaint against the so-called “Supertrader” Karen Bruton provides many opportunities to review what may have happened. It will take a while before the allegations against Ms. Bruton will be settled in court or through some type of SEC Settlement. Keep in mind that in an email response to The Street, Hope Advisors said it was “cooperating fully with the SEC’s inquiry, even though we strongly disagree with the allegations in its complaint.”

The emergence of the news has caused TastyTrade.com, an Options Trading Information Source, to remove access to their interviews with her pending further developments. TastyTrade showed tremendous interest in the “Supertrader” and there is an interesting YouTube video that discusses one of her popular Trading Strategies which is currently available; it may not be there long. The Options Trading Strategy of the "Supertrader"was Selling Naked Options to collect premium. Selling Options commits the Seller to either taking or making delivery of a particular instrument. In this case, the instrument was mostly the S&P 500 Futures. If one uses this type of Strategy, often times they will make money. However, when they lose money and are not able to manage the losses, disaster can set in.

From listening to an interview with the “Supertrader” last week, taped a couple of years ago, it was apparent to me that for people with risk management experience, Tom Sosnoff and the members of his team were unable to cut to the heart of either her risk management technique or methodology of cutting losses. Options Traders can have exposure to significant losses. It is essential that they have Strategies to confront pending disasters and to be well enough capitalized to tolerate losses.

There are numerous traders who have lost tremendous sums of money Selling Naked Options, however, in most cases, rather than resorting to the alleged “deceptive trade practices” accept the losses and move on. For someone as well known in her trading circles, Ms. Bruton may have had a difficult time accepting her losses and looked for a way to perhaps put them on hold. This is a guess, but with 30 years in Options Trading and Risk Management, I’ve seen this behavior before. In the days before computerized trading, some traders from various Trading Pits would, on occasion, “float” a trade in order to see if the market came back before they closed out the position. “Floating” involved the Trader intentionally sending the trade to the wrong Clearing Member either until the trade became profitable or someone figured it out the shenanigans. It wouldn’t surprise me if Karen Bruton and Hope Advisors recognized that they had enormous losses but felt that if they could delay passing on the news to their investors, the market might provide them the opportunity to make the money back.

Trading Options Contracts involves a considerable knowledge base. The Options Syllabus may be a good starting point for seeing where you stand and where Ms. Bruton might have gone wrong. The first spot would clearly be in the analysis of Delta. It you’re trading Options and not looking at the Delta, you are making a significant Risk Management error. Selling Naked Options sounds like an easy way to make money. However, as traders prove time and again, Selling them is easy, but managing a Portfolio is much more difficult. Until the case is completed, with the little details I have about the Karen Bruton case, I think it’s impossible to legitimately compare her actions to those of Ponzi and Madoff (although those names are used to discuss many cases of financial fraud). At this point, what is clear is that there was a risk management crisis followed by allegations by the Securities Exchange Commission of deceptive trade practices and other infractions. That should be enough to give any money manager agita. If you have any questions, Contact Us.

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

 

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