As you probably know, there are about a million different newsletters and websites out there promising outlandish returns and overnight success, and all for the low, low fee of half of your life savings. You’ve seen them advertised online and on late-night television, and you may even have tried one or two of those sites before.

The truth is, one reason we started Condor Options was to provide investors and average traders with an honest and rational alternative to all the hype and misinformation. We know, and you know, that options trading will not make you rich overnight, and that anyone who says it will is actually asking you to take on undue levels of risk, and is probably overcharging you for the privilege. By contrast, we aim to teach investors how to use market neutral strategies like the iron condor to achieve results that are:

• consistent
• market-beating
• and have limited risk.

That’s already a pretty tall order: the Efficient Market Hypothesis claims that it isn’t possible to outperform market averages over the long run without luck or access to secret information. We’re not very lucky, and we don’t have any insider tips (we trade indexes, after all!), and yet we think that over time, market-neutral options strategies really can beat the markets in a consistent and risk-limited way.

But where we are honest about the challenges that face every investor, most newsletters and trading services pretend that they have such magical stock-picking powers that they can endlessly generate alpha without breaking a sweat.

In this new Takedowns series, we will do something that no one else has ever done (as far as we know): we will take on the financial publishing industry - the newsletters and the self-appointed gurus and the hype-ridden trading services - and expose the tricks, half-truths, and outright fraud that they use to keep themselves in business. Believe it or not, some of these companies have even been taken to court for their tactics, and we’ll reveal them as well. Since there are so many nefarious candidates to choose from, we will try to limit ourselves to the world of options trading, and in our review of each site, will try to answer the following questions:

1. Is their marketing honest?
2. Are their returns repeatable?
3. Does their strategy entail unlimited risk?
4. Is their price reasonable, assuming an investor with $10,000 to work with?

Those, we think, are the most important questions; if we’ve forgotten any that can’t be subsumed under any of the questions above, feel free to let us know.

Last point: there’s an obvious conflict of interest in this project, in that we provide a service in the same industry that we are critiquing, so it’s hard to imagine us being particularly unbiased. That’s a fair objection; but that’s why we’ve set out those four questions above, so that we have some consistent and objective criteria by which to judge others (and ourselves). Another response is that, if anything, we should be silent about the existence of our competitors: after all, we’re giving them free publicity and traffic. But that’s only more proof that we’re just as interested in debunking industry myths as we are in hawking our own product. And by all means, if you object or have a rebuttal to anything here or in the forthcoming series, we’re always up for some conversation.

Our first Takedown will be posted in the next few days…don’t miss it.

Last week, we alerted you to the work of one of our favorite mainstream market analysts, John Hussman. He has been advocating a well-hedged and cautious approach to the markets for some time now, and given last week’s action, it seems there has never been a better time to get market neutral.

Of course, the whole point of our Iron Condor Strategy is to defy the myth that you have to predict market directions in order to make good money; and since iron condors are by definition a market neutral trade, we never have to worry about being inadequately hedged against market underperformance.

In this week’s comment, Hussman practically makes our case for us:

Probably the most useful guidance is to say that the probable return to market risk is sufficiently below Treasury bill yields to warrant a fully hedged position, but for risk management purposes, it’s never a good idea to rule out an advance. Overall, investors should not position their investment portfolios in ways that would have the effect of relying on a market decline or a market advance.

“Positioning ourselves to never rely on a market decline or a market advance” - while that’s not a very catchy slogan, it describes perfectly what our strategy is all about.

On the S&P 500 ETF (SPY) chart above, the trendline that developed from March through May is clearly broken, as the price no longer hovers between the middle and top of its Bollinger Bands, but rather has bounced around in a range since the beginning of June. The very low ADX reading also signals that range-bound conditions may prevail for some time.

Our market outlook is very weak. Stocks in general look overbought, both in technical terms and in terms of fundamental valuations. Internal breadth, price trends, and higher sustained volatility all suggest that even if we are not entering a new period of significant market weakness, the bullish party may be well over.

And as you know, when one party ends, there’s usually another beginning somewhere else…

You may have figured out by now that we’re not big fans of the mainstream media. Except, that is, when mainstream media attack mainstream institutional finance. In a recent piece from CNN Money:

A trustworthy planner should be able to tell you how he makes money off you. It’s the ones who constantly bleat “The client comes first” who worry me. To protect yourself, I suggest the following:

1. Always ask your planner to estimate your total costs and what benefit you are getting for it.

2. Ask if there is an alternative way to meet your goals that lets you keep more of your money.

3. Get the planner to put the above two answers in writing. If he won’t, ask yourself why.

4. Always know what you are buying. As a general rule, the more complex it is, the worse it is for you.

In short, nothing, especially good financial advice, is ever really free, so if you can’t figure out how your broker or advisor or planner is making a profit, then chances are he/she/it is screwing you somehow. This advice applies to options trading just as much as it does to IRAs and 401ks. Decent option trade ideas are never free, and free option trade ideas are never decent.

(Well…almost never. We did send an alert out to members of our iron condor trading service and to readers of Condor Options Reports on July 17 that did pretty well. By “pretty well” we mean that it returned in excess of 30% the very next day. But I digress.)

Just in case you’re wondering, “Do these guys practice what they preach,” consider our answers to those four important questions above. It should be noted, of course, that we’re not professional financial planners, for the simple reason that sitting at a desk all day trying to hawk crappy mutual funds and variable annuities to innocent investors isn’t our idea of a fun way to make a living. Anyway:

1. Total costs: the total costs of trading with us are about as obvious as it gets: $99/month for a membership (that is, if you can get one), plus commission costs at your broker, which should be minimal.
2. Alternatives: well, of course there are alternatives to us, and some of them might even make you money :) But none of those alternatives will beat the market averages, beat the mutual fund industry, outperform buy-and-hold conservatives, outperform CNBC Booyah crazies, and reduce portfolio volatility like our market-neutral iron condor strategy. Enough boasting.
3. Put it in writing: we just did.
4. Complexity is bad: True enough. That’s why we trade one strategy and trade it according to well-tested rules. What’s that you say? Iron condors are complex? Well, they’re not for children, sure, but understanding an iron condor is certainly easier than learning all the ins and outs of interest-only 3/1 ARM mortgages, and people don’t think twice about buying those (though they really should). Seriously, if you can play poker or chess or do long division, you can understand iron condors easily.

And that does it. You don’t have to “trust us,” now or ever, because we know we’re only as good as our next trade. And we’d rather rely on our record any day!

One of our favorite mainstream sources for rational and clear-eyed market analysis is John Hussman of Hussman Funds. His weekly market comment gives a great overview of the major factors affecting markets, and he never seems to fall prey to the breathless paranoia or ideological cheerleading that is characteristic of so much financial commentary these days.

This week’s comment, “A Who’s Who of Awful Times to Invest,” discusses some of the key features of previous market downturns, and shows how today’s markets bear striking similarities to those awful prior periods. Hussman concludes with this:

As of last week, the Market Climate for stocks was characterized by unusually unfavorable valuations, extremely overbought conditions, tenuously favorable market action on the basis of market internals, and generally upward interest rate pressures. The current overvalued, overbought, overbullish combination of investment conditions has historically been associated with market returns below Treasury bill yields, on average. We need not forecast where the market will move in this particular instance – that average return below T-bill yields is enough to hold us to a defensive position.

Overvalued, overbought, and overbullish. Sounds pretty bearish, right? Not exactly - his whole point is that if the current market environment doesn’t justify an expectation that equities - with all their inherent risk - won’t outperform risk-free Treasuries, then it doesn’t make sense to put new money into the markets. One doesn’t have to call a market top or become a furry, clawed omnivore to recognize when market situations present too much risk. This is not a perspective you will ever hear on CNBC (not without it being ridiculed, that is).

Although we wouldn’t compare ourselves to John Hussman, we like to think or ourselves as pursuing the same sort of strategy. Iron condors certainly have their own unique set of virtues and vices, but on the most basic level we try to ignore the bullish cheerleaders, console the perpetual bears (not that there are many of them left), and take in profits from the sideways action caused by everyone else’s confusion.

Since we switched to ETF underlying instruments, the average return of our trades has been 33.5%. We’re not going to help you get rich quick or retire young, or live a life of sailboats and martinis and red sportscars. And you know why? Because all the people who make those kinds of promises aren’t being honest (you know the ones: “turn $5,000 into $1 million!!!” and “generate 2122% gains in 90 days!!!”).

What we do promise, and what we’d like to see more of in the finance industry, is an unbiased look at the markets, a strategy for making consistent, risk-aware, and realistic profits, and (we’re particularly insistent on this last point) personal attention and investor education, rather than just a lot of shouted stock picks (“BuyBuyBuy!”) and paternalistic “advice.” Hussman makes that kind of effort, as does Barry Ritholtz, and we’d like to count ourselves among those ranks.

As you may have heard from 50 different news sources by now, the Dow had its biggest day in four years yesterday, rising over 2% in the session. This was a broad-based move, as every other index participated and the Nasdaq in particular continued its record-setting rise.

One small worry

The NYSE TICK reading yesterday was not everything it could/should have been, so it may be that institutional buying programs were not kicking in as strongly. This is particularly true with regard to issues in the Russell 2000, which has really been lagging the other indexes recently. In the coming days, we expect to see either the Russell small caps (IWM) picking up to join the fun or to see them lead the markets back down into the recent range-bound areas. Obviously, we would actually prefer to see the latter happen.

Glad to be neutral?

On days like yesterday, a chimp with a dartboard could make good picks. And you might think that days like yesterday make it tough to be as perpetually market neutral as we are here at Condor Options.

The truth is, it takes guts to be perpetual contrarian. When the market tanks, we have to be willing to find the upside; when the market rallies, we have to remind everyone that gravity still exists. But that’s why we let our strategy dictate trades, not our guts or our sentiment. That’s why we do the analytical work up front, and adopt a “fire-and-forget” approach whenever possible.

And on days like yesterday we’re glad to be neutral, that is to say, we’re glad to be in iron condors, because we can benefit from the upside, without having to worry whether everything will come crashing down tomorrow. Both of our primary positions this month are still well within their protected range, and by sucking the volatility out the markets yesterday, this rally has positioned us to take in that last bit of theta over the weekend.

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