It’s been over three months since we posted a takedown, and you guys are getting restless. So, Monthly Cash Thru Options is one site that people seem to request a lot.
What do they provide? A newsletter publishing credit spreads and iron condors. Summary conclusion: While the basic strategy is sound (hint: we trade iron condors too), we have some serious questions about the risk management and long-term viability of the approach taken on this site.
Honest marketing - Pass
To be honest, we couldn’t track down much in the way of marketing for this site in the first place, so they kind of get a pass by default. When you look at some of the worst offenders in this industry (”turn $20 into $2 million in 2 weeks,” etc.), any company that isn’t spending half its time and effort on marketing starts to look like a godsend. Really. So give MCTO a pat on the back for not being sleazy in the marketing department!
That said, we do find one mismatch between their advertising and the actual trades published: MCTO sells itself as a non-directional newsletter, but a very large portion of their trades turn out to be vertical credit spreads, which are directional trades.
Repeatable returns - Pass
We’re giving them a pass here, too: the performance data available seems thorough enough. There is a bit of ambiguity in the performance tables - certain adjustments made to trades were hard to follow on a first glance, and there were often wide ranges posted as the possible credit for a given trade. While it’s commendable to note honestly that a given trade may have generated between $0.90 and $1.25 in credit (rather than, say, just pretend that everyone could have been filled at the best possible price), that’s a large enough difference to warrant a bit of concern, if only because the high-risk, low-credit nature of their strategy means every nickel and dime is absolutely essential.
Risk management - Fail
Which brings us to our primary concerns. First is the question of asset allocation. A browse through the site’s FAQ yields the following interesting bit of information:
“The MCTO team follows the philosophy of putting 80% of our portfolio into credit-type, non-directional trades to generate a consistent monthly cash flow and about a 50% ROI annually, and then taking 20% of our portfolio and try to “swing for the fences” with other types of directional option trades…we recommend that our subscribers first get 80% of their portfolio productive through the lower effort, less stressful and more consistent credit-type, non-directional option trades to achieve an outstanding 4% to 7% monthly return or 50% or more annually - which is what this advisory focuses on.”
On its face, this is actually a totally reasonable approach to allocation: put the bulk of your capital into long theta and other boring positions, and leave a little room for directional home runs. But if you were a new subscriber to Monthly Cash Thru Options and you read the paragraph above, would you have the impression that you should be putting 80% of your capital into MCTO trades? We would. Even if that’s not what the publishers intend to say, the asset allocation discussions on the site never bother to mention that a reasonable approach to asset allocation means spreading your capital across a lot more than just two or three positions. Elsewhere on the site, they say:
“You can also allocate up to 100% of your portfolio to this single index credit spread system….which is not the case for most other trading systems.”
That’s a much clearer statement of their view, and the thought of someone dumping 100% of their portfolio into one or two RUT iron condors every month is, from a risk management perspective, just horrifying. So when they say “we recommend that our subscribers” do X and X doesn’t include a serious discussion of proper portfolio management, well that’s a major cause for concern.
Second, the strategy employed here is fundamentally riskier than the strategy that we use, and the reasons why aren’t at all intuitive, so it’s easy to get confused on this issue. To get right to the point, there are basically two approaches to trading iron condors and credit spreads:
- High-risk, low-credit: you open an iron condor with a really wide body, say 20% or something like that between the short strikes, accept a relatively minuscule amount of credit, and hold to expiration. The advantage of this approach is that it generates what, on paper, look like much higher probability trades, meaning that they should have a higher likelihood of expiring out of the money, allowing you to keep the small amount of credit generated by the trade.
- Medium-risk, high-credit: with this approach, you open trades that have a narrower body, and thus a lower probability of expiring out of the money, and in return for that lower probability you receive a significantly higher credit up front. The advantage of this approach, besides the obvious one of a higher potential profit, is that the higher initial credit acts as a buffer against losses in the event of a spike in the underlying.
This is a site takedown, not a trading article, so we won’t get too detailed here, but on first glance it may seem that approach #2 is the riskier one, right? Your probability of the trade expiring worthless is lower, so doesn’t that make the strategy riskier? Not exactly. In trades following approach #2, you might risk $1 to make $0.65, and your trades may have about a 50-70% chance of success. In trades following approach #1, you might risk $1 to make $0.10, and your trades may have about a 90% chance of success. The reason that approach #1 is actually a much higher-risk strategy is that you’re putting a lot more capital at risk for such a small reward, and that dramatically unbalanced risk-reward ratio means that the occasional loss will have a much, much harsher impact.
Example: for January 2008 expiration, MCTO sold the SPX 1330/1340 put vertical for a $0.75 credit. That means that one contract of this trade would put $925 at risk in order to make $75. Monthly Cash Thru Options uses this high-risk approach to trading iron condors and credit spreads, but doesn’t admit the higher risk involved.
Finally, like so many condor trading sites out there, MCTO insists on trading the big index products like SPX, RUT, MID, etc. That’s fine for institutions and professional traders, but new and smaller retail traders are at a distinct disadvantage when using those products instead of the corresponding ETFs (SPY, IWM, etc.). We’ve written about this many times before so we’re not going to rehash old points, but suffice to say that using those bigger products only makes the risk management process more difficult for individual traders.
Reasonable Price - Fail
This is kind of a subjective determination, but from what we can tell MCTO publishes one, two, or sometimes three iron condors or credit spreads per month. At $65 per month, it’s not particularly pricey, but then, you also get what you pay for: there’s no blog or other ongoing educational aspect that we could find, and the educational content that is available isn’t all that detailed and is mostly of an introductory and/or practical nature (e.g.: “what are credit spreads?” “How to tweak the bid on your order”). The content on the site in general isn’t well organized and has all the charm of a text dump. They don’t offer autotrading.
In fact, we may be able to save you the subscription fee altogether: every other week or so, pull up your options chains on SPX/RUT/MID, and find a trade that generates about $0.50 or so (that is to say, gives you $50 in return for you putting about $950 at risk). Let the trade expire worthless, or exit at the market price the day before expiration if it’s in the money. That’s about it!
Conclusion
We weren’t sure where to put this last point, but MCTO imposes this bizarre requirement that all subscribers open multiple accounts for trading their picks. We’ll let them explain:
Here is an example of why we need multiple accounts: Let’s say you have a SPX July 750/760 Bull Put Spread. Now the SPX (S&P 500 index) rallies and you would like to open a SPX July 760/770 Bull Put Spread to push your spread up a little closer to the underlying SPX index. If you try to open this new spread in the same account, your short 760 Put will cancel out the long 760 Put and you will end up with a 20 point wide 750/770 bull put spread. We want to keep the spreads 10 points wide and not 20 points. Thus, you will need to open up a secondary account to hold trades that would normally overlap with existing trades in your primary account.
That’s just absurd and weird. A 20 point wide spread is no riskier or different in any way than two 10 point spreads that have an overlapping strike. Maybe they’re working with a broker that is hostile to options trading and imposes draconian margin requirements or something.
When you consider the minimal education, the poor portfolio management, the old-school SPX preference, and the high-risk strategy - not to mention the prefab template website straight out of the early 1990s - there are definitely better newsletters out there than Monthly Cash Thru Options.
