As promised, we’re resuming our newsletter takedowns series this week. A reader requested we review a site called Virtual Investing Club and their related product called “Option Magic.”

What do they sell? An introductory book & DVD (”Option Magic”) about options trading, plus access to a website (Virtual Investing Club) where they track a model stock & options portfolio. Summary conclusion: There are dozens of plain vanilla “intro to options trading” books and ebooks out there, and we can’t imagine why anyone would pay $55 for basic information that’s available for free at other reputable sites. There must be hundreds of even plainer vanilla stock & options newsletters out there, and the complete lack of any verifiable track record plus the over-hyped marketing make us wonder exactly who is paying up for this stuff. In short, this is exactly the kind of tripe that gives options education a bad name.

That’s actually all you need to know, but for all the gory details (including some truly hilarious marketing copy), keep reading…

Read the rest of this entry »

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:

1. 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.
2. 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.

We’ve all been there: it’s late, you can’t sleep, and there’s nothing much on TV. (And Tivo hasn’t been invented yet.) You flip through and happen upon a guy in a sailboat, who apparently also owns lots of red sports cars and spends a lot of time running down the beach with beautiful women. How did he get this way? Why, by buying the [fill in the blank] trading course, of course!

Wizetrade, Teach Me to Trade, Optionetics… they all make trading sound so easy. Well, in case you’re ever tempted to spend any of your valuable time with any of these people, be sure to check around online first. Most of those courses and programs, as you might suppose, aren’t quite what they claim to be (to say the least).

Infomercialscams.com is one of many sites that does the laudable work of providing a place for people to rate and assess companies that sell via infomercial. The site isn’t restricted to wealth-building scams, either. The Kevin Trudeau page, for example, contains exactly as many unhappy customers as you’d expect. Although you have to wonder about anybody gullible enough to buy a book called “Natural Cures ‘They’ Don’t Want You to Know About.” Anyway, according to Consumerist, Infomercialscams.com is constantly getting sued by all the companies that get discussed there. Which is to be expected, I guess.

Good rule of thumb: if anyone trying to sell you something ever mentions sailboats, sports cars, beautiful women, retiring early, easy weight loss, a clean house, five minute meal preparation, or any combination of the above, run like hell. Unless, of course, you’re actually trying to buy a sailboat or a sports car.

What’s a “siamese condor”, you ask? Mike Parnos explains. We’re only bringing this up because a member asked, and because it presents such a great opportunity to ridicule yet another snake oil salesman, as we’ve become known for doing in our Takedowns series. Incidentally, we’ve actually already dealt with Mike Parnos and his Couch Potato Trader newsletter.

Here’s the thing: Mike Parnos is either utterly mendacious or merely hopelessly clueless. But hang on, let’s give him the first word:

The iron condor, however, does not fly alone. It has a distant relative called the “Siamese condor.” Like the iron condor, the Siamese condor consists of four options working together in the form of two credit spreads. Unlike the iron condor, the short put and call are joined at the same strike price — which, of course, is why I named it “Siamese;” this put and call are then hedged with another put and call. The risk is small and the potential rewards are high – higher than the iron condor.

Both strategies seem to offer traders a great way to generate profits, so why trade the Siamese condor instead of the iron condor? Pay close attention.

Ooh, sounds intriguing, yes? Here’s the problem: despite Parnos’s claim to have named this trade, it already has a name, thank you very much. If you sell a put and a call with the same strike price, and then hedge with a long call and long put, well that’s called an iron butterfly. We’ve all been trading iron butterflies for years and years. We can overlook Parnos’s smarmy writing style and pedantic tone, but not this.

In political circles this is known as “Reagan’s dilemma”, named after the situation the Gipper found himself in during the Iran-Contra scandal. Did Reagan know about the Contras and do nothing? Then he was a lying criminal. Or was he completely in the dark about the whole affair? Then he was completely incompetent.

Similarly, either Parnos - who has written articles all over the internet, runs a newsletter, and is supposedly starting a hedge fund (of course he is!) - already knew that such a thing as the iron butterfly existed, or he didn’t. If he already knew about this strategy, but chose to rename it and claim it as his own anyway, then he’s nothing more than a deceitful self-promoter. And if he didn’t know about the strategy, and just by sheer luck happened to stumble upon it, then he’s pretty clueless and should be reading some basic books about options, not writing about them as an expert. Also, while iron butterflies are great and have their place in the pantheon of strategies, they’re in no way the one-size-fits-all strategy Parnos makes them out to be.

So while it might seem kind of petty to get so worked up about the silly name of some trade, the truth is that the content of the dispute is kind of irrelevant: you’ve got a self-proclaimed expert caught in a situation in which he’s either embarrassingly ignorant or willfully deceptive. (Also: will Stocks, Futures, and Options Magazine publish anybody? I mean, it’s obviously not a peer-reviewed financial journal, but still.)

Announcement

In other news, we’ve just created a new kind of options strategy here at Condor Options. It’s called the Serbian Half-Nelson Time-travel Spread, and it consists of selling one front month option at a certain strike and buying one next-month option at an identical strike. It’s pure genius, and no one has ever thought of it before.

We get a lot of requests for takedowns of different sites and newsletters now. One problem is that new services seem to crop up constantly, at a much faster rate than we can debunk them, in a kind of perpetual game of whack-a-mole. The subject of this takedown is a very prominent newsletter site called OptionInvestor.com. They’ve been around for awhile now, and we’ve received some questions about them.

What do they provide? Eight, count ‘em eight different newsletters, ranging from stock picks and covered calls to LEAPs, vertical spreads, and iron condors.

Summary conclusion: As a rule, we like to avoid newsletters that have been accused of fraud by the SEC. Maybe that’s just us. Want to know more? Keep reading…

Honest marketing - Fail

As you can see, one of their Google ads reveals some very interesting information: namely, that you too can make 188% profits! So what are you waiting for? Go get your 188% profits! What, you want more information? Okay:

Right, so this Yahoo ad gives us even more information. Not only have you been missing out on 188% profits; you could’ve been booking said profits in Days! Don’t you feel silly.

But if you thought those search engine ads were over the top, check out the emails they send (at left). It’s a classic technique - list all your winners, ignore your losers, and hope no one notices. We suppose the real question all this hype raises is: with returns like that, how does OptionInvestor ever retain any members? After quadrupling their portfolios, don’t all their subscribers retire to the Bahamas or something? Sarcasm aside, this is the sort of marketing that we could all do without. Only an idiot would think that it was possible to nearly triple your capital in one or two trades, in a matter of days, as a matter of course. And only the half-brained son of an idiot would think that is was possible to do all that without taking on an extreme amount of risk that would be just as likely to blow out your entire account.

That’s probably enough analysis of their marketing - we’ve heard this story many, many times before.

Repeatable returns - Fail

This section is kind of tough to write. As we mentioned, they track 8 different newsletters at this site: covered calls, credit spreads, technical analysis on stocks, naked calls/puts on indexes, iron condors, etc. How on Earth are we going to review and evaluate the performance results for 8 newsletters - we’ll be buried in data!

But we want you to be well informed, and so we decided to take on this enormous task. After mustering up all the strength and energy we could, we have compiled and cross-referenced the available performance data for these newsletters and posted it here, for you:

<…crickets chirping…>

That’s right, they don’t provide any data. No charts, tables, or trade histories of any kind. So these newsletters could be publishing genius trades on RIMM and SPY and whatever, but we have no way of knowing. And we certainly can’t verify that their returns are repeatable by the average subscriber. And you know what? The SEC agrees with us (well, we agree with them, but whatever):

According to the complaint, OptionInvestor.com claimed actual returns ranging from 60% to 240% for subscribers who followed its trading philosophy and trading recommendations. The SEC alleges that all of the performance claims were hypothetical, not actual, and that it was impossible for subscribers to achieve similar results. [link]

Did you catch that? The performance claimed was just hypothetical, not actual. Well, surely OptionInvestor challenged that accusation, right? Not quite:

Without admitting or denying the allegations in the complaint, Sunset Investment Group and Brown consented to the entry of an order that enjoins them from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 under the Exchange Act, and agreed together to pay a civil money penalty of $70,000. The SEC also seeks permanent injunctive relief and civil money penalties against Pinnacle Capital and Tanner.

Hmm. So does that mean that the 188% returns we are expecting in a matter of “Days” might take a couple of weeks instead?

Risk management - Fail

We have some admittedly high standards when it comes to risk management. Ten years ago, maybe it was okay to toss people a few stock picks and wish them well. But given how many tools are now available to the average retail trader, there’s no excuse for leaving people with unhedged deltas. Most of the newsletters at this site seem to be garden-variety stock picking newsletters, some of which use options - but not in order to reduce risk but rather to boost leverage, which is just nuts. As for the rest, covered calls are covered calls (yawn), credit spreads are okay but not ideal, and iron condors are obviously great if you construct them properly. And again, since we get no performance data or other details of any kind, we can’t assume that their condors are constructed in a risk-appropriate way.

One curious feature of this site is that they offer a sort of “all access pass” that gives you access to their entire range of content. Maybe it’s great to get blasted by eight different newsletters, but it sounds positively awful to us - who has the time, capital, and attention span to follow that much advice? And more importantly, is it realistic to think that someone receiving that many picks and that much pontification is really going to maintain an appropriate level of risk?

Reasonable Price - Fail

Prices range from$29 to$99 for the various newsletters. In absolute terms, that’s obviously not a big deal. But what about value for money? We tested out their covered call newsletter some time ago as a lark, and were disappointed to find that the weekly updates were nothing more than a table of possible covered call candidates dumped into your inbox. Furthermore, one of our members had this to say about his experience with OptionInvestor.com:

I actually subscribed to his newsletter for one month. I sent him 3 e-mails during the month and none were returned. I quit…because of his awful writings and advice. He needs to be debunked!!

Sounds like customer service is either minimal or nonexistent - maybe they’re swamped with so many members, they’ve decided to take the Comcast approach (”we’ll ignore people’s requests, and simply call all those cancellations ‘churn’”). In any event, if the newsletter isn’t useful and the people providing it aren’t helpful, does saving a few bucks on the price really make things any better?

Conclusion

In case you needed one more reason to run screaming from OptionInvestor.com, here it is: if you give them your email address for any reason, you will start receiving spam for over-the-counter stocks. In order to shield themselves from any deserved further legal action, they post this disclaimer at the end of their spam:

In other words, for $2680 they’re willing to dump the worst kind of misleading tripe on their subscribers and on anyone else who’s ever given them an email address. This is not a company who has the interests of its customers at heart.