Another reason not to be jealous of your friends and neighbors who’ve been suckered into hedge funds:

[Via Abnormal Returns]

A lot of traders out there still spend their time making directional calls. A lot of trading blogs write posts of the general format: “Here’s what the market did today; here’s why; here’s what I think will happen in the future.” You may have noticed that we don’t do either - we almost never make directional calls, and our market commentary is almost never daily play-by-play.

We don’t make directional calls because we’re perpetually market-neutral. The simple truth is that the properties of options that allow us to profit from time decay also allow us to remain totally agnostic about market direction. And the reason we don’t post daily chatter about every Dow tick is that, for the most part, people who do are just making things up anyway. Have you ever noticed the headlines on, for example, Yahoo Finance? The same event can be and will be used repeatedly to justify mutually exclusive market outcomes, i.e.:

“Investors nervous about hurricane Bruce; markets fall.”
“Hurricane threat rallies oil stocks; markets follow.”
“Housing slump triggers market selloff.”
“Markets rise on hope that housing data will spur rate cut.”
“Banking merger fails; investors worried.”
“Merger fails, markets rise: nobody liked that merger in the first place.”

And so on. The truth is: the financial markets are far too complex for the activity in one trading day to be accurately captured in a headline. It’s the job of financial journalists to report on the issues that are moving the markets, but consider this: have you ever once seen the headline “Markets rally; we have no idea why”? Of course not. The financial media have a hard enough time of it, without admitting that half the time they’re just guessing along with the rest of us.

Let’s finish up with a little challenge to all the trading bloggers and financial journalists and investing gurus out there who so love to “explain” the markets. Interpret this:

That’s the DJIA, and those last two bars are the past two days. And while it’s not nearly as sexy and is a lot more humbling, we’re content to take the headline position: “Market retraces its previous day’s losses. Hmm. Whatever.”

This is part four in our series, Newsletter and Trading Service Takedowns. This series has become wildly popular, and we really appreciate all of your feedback. This week’s candidate, unlike some of our previous targets, actually seems like something closer to a legitimate business. [Update: cancel that, they seem to run a bunch of different websites offering everything from real estate seminars to "lifestyle health" and personal coaching. Skeezy. And what's with companies trying to sell everything under the sun: whatever happened to "do one thing, and do it well"? Call us old-fashioned.] But we’ll let you draw your own conclusions, and we’ll certainly subject them to the same scrutiny with which we always examine trading newsletters. This week’s candidate is a site called Option Partners, and if you really want to check them out, just stick a .com after their name in your browser. On to the review:

Honest marketing - Fail

Exhibit A is a marketing video that they had professionally produced and is posted on their website and on Youtube. As you can see, it features the standard speedboat, sportscar, and champagne that are trademarks of cheesy marketing videos the world over. As a rule of thumb: if someone promises to make you rich, or promises you boats and cars and riches that you “never thought possible,” they’re lying. One of the tag lines that floats across the screen in this video simply reads “Make Money”; that made us laugh for some reason. One last point of contention: the video claims that the reason that people are rich is because they have experienced options advisors, and that’s just stupid. Some people are rich because they work hard, some are rich because they were born into wealth, and many people are rich because they exploit other people who are poor. No one who wasn’t rich yesterday is rich today just because they hired Option Partners (or us, for that matter, or anyone else): options trading is a great way to supplement your income and to boost your returns, but it’s not the answer to life, okay?

The marketing on their site is pretty muted and boilerplate, and we didn’t find any online advertising to speak of.

Repeatable returns - Pass

For the rest of this review, we’re only going to focus on the “Hedge Series” product that they offer, because it’s the one most similar to what we offer. This is an iron condor newsletter, and they issue 9-12 trades per year. The one positive thing to say about this site it that their performance data is pretty transparent, and they’ve (apparently) been audited by some relevant Australian auditors. Ultimately, they get a pass by default here because, when it comes to iron condors, it’s hard not to have repeatable returns - the strategy is inherently built that way.

Risk management - Fail

This mark of Fail should surprise you. Iron condors are risk defined, so Option Partners’s Hedge Series should get a pass on this, right? Well yes, except that they advise clients to allocate up to 30% of their accounts to one position. This is a recipe for disaster, because every strategy will have the occasional losing months. Meet Thom, a new member to Option Partners. He joined up just this week, and has allocated 30% of his $10,000 account to one of their trades. Fast forward to September expiration, and oh, it looks like this was one of those rare but unfortunate losing months. Now poor Thom only has $7,000, and because this company seems to prefer high-risk/low-reward iron condors averaging around $600 profit, it will take Thom at least 5 months just to get back to a breakeven point. That’s why we suggest a 5-10% absolute maximum allocation for any one position, and that’s also why we pursue trades that have a better risk/reward ratio.

Reasonable Price - Fail

Their iron condor service costs USD $1089. That’s cheaper than us! But they only offer an annual membership, so you don’t get to try the service out first to see whether it’s a good fit. More importantly, you’re paying them $90/month for one measly trade, at most (9-12 trades per year means there may be up to three months with no positions at all). Heck, if we charged $90 per trade alert, we’d have to ask for $270-$450 per month! Seriously, the reason we enter 3-5 positions per month is to diversify our risk, and to capture divergence in the correlation of different indexes. These guys only trade options on the OEX, so you’re stuck with the action of that one index. Bad value for money, in our opinion.

And seriously, what’s with selling real estate seminar junk, weight loss junk, and coaching advice along with stock picks and options trades? [link]  It’s no wonder this industry has a bad name.  We say this every week, but we really do feel kind of greasy and slimy just for delving into the world of options newsletters every week.  We hope you don’t associate us with our reprobate peers.

All the major indices are adding ~1% this morning, but we’re not buying it. Literally, we’re not getting long anything right now. Some things to consider:

• This subprime mortgage / credit crunch stuff isn’t over yet, and we haven’t seen any persuasive evidence that Fed actions will be sufficient to smooth everything over.
• The downtrending channel that developed in many stocks and indices over the past month is only now being tested on the upside, and until that channel ceiling starts to act as support on an upward move, there’s good reason to be cautious.
• Although a VIX of 23 would have seemed scary even a few weeks ago, volatility has been getting plowed for several days now, and it’s time for at least a modest bump.

Of course, this is all just wild speculation - I mean, who are we to be so pessimistic? Dow 15,000 coming right up; break out the all-time high graphic!

Like anyone else with half a brain and an once of honesty, we wouldn’t begin to dare to predict where the market will be by this time next week. So we look for some relative stability - not so much trying to eek out any substantive divergence in correlation, more to put our eggs in baskets that stand less chance of being overturned.

As you can see from the chart, the NDX (Nasdaq 100) performed basically the same as the SPX (S&P 500) during the recent unpleasantness. But tech is still stronger on the year, and more importantly, the Nasdaq isn’t as vulnerable to the financial sector, which means that if you think that this credit/liquidity/mortgage/robber baron stuff isn’t completely over yet, you may want to take a look at tech.

Yes, thanks for asking, it is kind of weird to be calling “safe” the sector that gave us the dot-com bubble. In any event, we already have a trade open in QQQQ for our members.