Note from Tim. The following is kindly contributed by Buccaneer. The first part can be read here. I am not sure what preamble is required with respect to what I assume is an ongoing legal case, except to say that the words below are obviously a matter of personal opinion and none of these are offered as fact or conclusive findings: On Karen Bruton the Supertrader (KST) topic here’s my analysis about her case. (Links to SEC PDFs are here and here).

Unfortunately, the market had been moving up, and as you all know the adjustments to the Call side being tested can and do include selling Puts also. This works effectively if the volatility stays low and market keeps moving up or flattens out. But where you run into trouble is when this upward moving market suddenly dips with a big vol increase, which is exactly what happened with the Oct 2014 dip. So now Karen had sold many Puts at low vol in an up market, and they suddenly generated significant paper losses.