In recent days, the RVX (Russell 2000 volatility index) continues to track the VIX (S&P 500 volatility) and VXO very closely, but this shouldn’t be happening given the recent out-performance of large cap equities relative to small caps. As RUT got plowed last week versus SPX and OEX, we should’ve seen the gap narrow between the RVX and the VIX/VXO in absolute terms, but we didn’t. The first chart shows the relative underperformance of RUT:
The second chart shows that, in spite of this underperformance, the indices’ respective volatility trackers did not converge as they would be expected to (we should see the RVX catch up to the VIX/VXO somewhat, rather than just mimicking them):

One guess we have is that hedge funds and institutions may be using the ETFs as primary hedging vehicles more regularly now, whereas in prior years they would’ve just bought puts. If true, that means that important information isn’t being registered by the CBOE’s volatility indices.

We’re also thinking that there’s a decent volatility arbitrage opportunity here: if our hypothesis is correct that there is more real volatility in the small caps than is being registered in the RVX and in option prices, a long straddle on IWM (going long volatility) combined with a short iron condor on SPY (shorting volatility) should let us capture any unregistered difference. Since volatility is generally a good deal higher recently, we’d pursue this arbitrage trade as a 2:3 ratio (2 IWM straddles for every 3 SPY iron condors).

This is part one of our new series, Newsletter and Trading Service Takedowns. In this series, we examine prominent option trading sites and newsletters, testing them on four important factors:

1. Honest marketing
2. Repeatable returns
3. Risk management
4. Reasonable price

For now, we will focus exclusively on sites that deal with options, and not only those that trade iron condors. Some of the sites we review will pass our test, and as unorthodox as it is, we don’t mind giving a thumbs up to our competitors when they’re honest and provide a quality product. But we are also ruthless when it comes to deceptive publishers who are only out to grab your money. Today, unfortunately, we must be ruthless… we’re reviewing a site called Options Success, and our summary opinion is that we can’t imagine why anyone would ever subscribe to this particular site.

Honest marketing - Pass

Options Success gets a pass on marketing, but only by default. That is to say, they do no discernible marketing, at least online. However, the cheesy message that greets you on the main page of their website tempted us to change our minds:

This guy is wearing a tie, and holding his hands out toward us, so he must be honest!  I mean, we all know that everyone who trades options has “all the money they ever dreamed of,” right? And just what are those three magic things we need to get right? Get this: 1) “get the direction of the stock right,” 2) “don’t lose,” 3) “create an automatic money machine.” Hmm, a pretty tall order.

Repeatable returns - Fail

This is the section where we assess the discernible quality of the product on offer. Can it possibly live up to the marketing claims; are signals easy to follow and accurately tracked; does the system produce repeatable results?

Now, you’d never know this, since it’s buried halfway down the subscribe page, but if you sign up to their site expecting, you know, actual trades, prepare to be disappointed:

“We won’t suggest specific options to buy or sell—you’ll be able to figure that out much better on your own from what you’ll learn in your Options Success trading package…of course you are free to modify that approach at will based on your own trading style.”

From this section we learn three things: 1) As a subscriber the most you should hope for each day are a couple of stock picks, and it’s entirely up to you to find a good options strategy to act on those picks, 2) you’re expected to buy something called the “Options Success trading package” in order to actually benefit from your subscription, and 3) “you are free to modify that approach” is code for “we will not be tracking performance or assessing the quality of our picks, since it’s up to you to trade them.” So it’s literally impossible to track the performance of this service, since there are no concrete trades on which performance tracking could be based. And that means that a subscriber has no guaranteed way to repeat any claimed results.

Risk management - Fail

The site fails in this category for the simple reason that neither the product on offer nor the site instructions make any mention whatsoever about hedging risk. If anything, the methodology on offer here discourages risk-defined positions: the entire purpose of subscribing is to get the directional stock picks of the publisher, and if the publisher is right, why bother to hedge those picks? We know that risk management is one of the most important aspects of trading - which is why we’ve made it a separate category - and this site certainly does not pass muster when it comes to risk.

Reasonable Price - Fail

A monthly subscription costs $97, which isn’t a big deal for a quality service. Since we have a hard time discerning any obvious quality in this service, that makes $97 a bad deal. Stock pickers are a dime-a-dozen, and the lack of any performance record whatsoever makes it impossible to know whether this picker is a good one.

What makes matters worse is that, as mentioned above, subscribers are expected to purchase a separate trading course in order to make use of the monthly subscription. That’s an extra $395 up front, just to get things started, and from what we can tell the sort of information on offer is readily available for free in any number of excellent places online.

Conclusion

We honestly don’t see the warrant for the existence of this site, and we feel a little guilty and dirty now for having called so much attention to it. But they’re obviously still in business after some time, so if one or two traders save their money as a result of this review, it’s worth the trouble.

We like to send out these little bonus trades from time to time, just for fun. Big disclaimers apply: we aren’t tracking these as part of our iron condor strategy, we may never mention this trade again, it may fail miserably, it may destroy your entire life savings and say mean things to your grandmother, etc. etc.

Trade: Buy the SPY August 148 straddle for $5.80. That means you’re buying +1 SPY August 148 call and +1 SPY August 148 put for a net debit of $580 per spread.

Analysis: Futures are pointing to a flat or just slightly down open, but that’s a big trick. After this week’s action, chances are *very* high that we will see another extreme move very soon. Everything from volatility indicators to breadth measurements signals that either a big up move or another step down is coming, and this straddle is well positioned to take advantage of either.

Think of it as a sort of insurance play against our iron condors (if you’re a member): if the market either tanks or rockets back up, that might cause some pain for our condors, but this straddle will be very profitable. If I’m wrong and we tread water at this level for awhile, volatility will get crushed and this straddle will die, but our condors will profit.

A good exit point for this trade? Right after a big move, or this time next week, whichever comes sooner.

Signup for our waiting list

That’s right, we’re finally jumping on the social media bandwagon. If you have no idea what that means: congratulations, you probably have a life outside the internets! You can now find us all over the place:

• Feedburner: if you’re keen on the whole RSS thing, you can now get Condor Options in your RSS reader of choice.
• Technorati
• and we certainly won’t stop you if you decide to submit this site to Del.icio.us or Digg (wink).

Okay, back to our charts…

Unless you’ve been living under a rock this week, you’ve noticed the broad-based forceful selling in the markets, and that (for example) the Dow and Nasdaq highs we heard so much about last week now seem like a distant memory.

It’s tough to ride out situations like this, but remember that periods of real uncertainty are what keep volatility premium in options prices, which in turn allow us to find profitable trades.

And there’s some good news from Dr. Brett at TraderFeed (another site we like):

I notice that we made over 1500 fresh 65-day lows across the NYSE, NASDAQ, and ASE on Tuesday. Since 2004 (N = 858 trading days), that’s been a pretty rare occurrence. Interestingly, following the 10 occasions in which we’ve exceeded 1500 new 65-day lows, the S&P 500 Index (SPY) has been up five days later all 10 times, by an average of 1.00%. By contrast, the average five-day gain for the remainder of the sample has been .17% (473 up, 346 down).

In other words, historically speaking we have every reason to look for a decent bounce in the very near future. He continues: “When we look 30 days following the days in which we’ve had more than 1500 new 65 day lows, SPY has been up by an average of 4.28% (9 up, 1 down).” So although it may seem like there’s no firm bottom in sight, we have every reason to hold on.

Members will receive position updates as necessary in the coming days. As always, we welcome your feedback!