6 Things Options Services Do To Turn You Into A Sucker

Thinking of joining an options advisory service?

Sorry guys. The sad news is that you’d almost certainly be better off just sticking your cash in a bank account.

Take a look at the guy over at Terry’s Tips, who was sued by the Securities and Exchange Commission (SEC), after he allegedly lost between 60% and 100% of his clients’ money. And he’s still in business…

In fact, CNN Money says that you’d be better off just throwing your money in the nearest dumpster than subscribing to investment advisory newsletters. Mark Hulbert of Dow Jones Marketwatch notes that if you had invested $10,000 in a portfolio in 1980 following the advice of the best performing advisory service of the previous year, and then changed it each year to the top service of the previous year, you would have lost pretty much all of your money.

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Here are some of the tricks these guys use to try to turn you into a sucker:

  1. They focus mainly on things which sound positive but generally don’t mean much in options trading, like the win/loss ratio. Who cares? When I was in the graduate training class for the global markets division of a bank, some big-wig came in and asked us all “how often do you need to be right about the market to make money?” The answers we gave generally ranged from 50% of the time or more, but the guy just barked back “No. You only need to be right once”. And he’s right – who cares if you’re profitable on 80% of your trades, if you lose ALL your money on losing 20%? People who sell systems on the internet, that’s who.
  2. They have huge drawdowns but then “learn their lesson”. e.g. 5PercentPerWeek.com lost nearly 95% of its money in just a few days in June of 2011 (and they charge you $239 per month!). Even if you earned 30% per year (considered an EXCEPTIONAL return by absolutely anyone who trades professionally), it would take you nearly 12 years to make back this loss. And just think how much you’d hate yourself for those 12 years knowing what a sucker you were. These services always say they’ve “learned their lesson and changed their approach” after these huge losses… and then a couple of years later the same thing happens. They just lost nearly all your money – anyone who does that should be out of business, end of story.

  3. They hold losing positions indefinitely. Services will frequently “roll out” losing positions until they finally turn around. In the meantime these services give out new recommendations which you can’t act upon because your money is tied up in the losing trade. What’s worse is that they often don’t account for these losses in their monthly returns that they report on their website, because they don’t consider them actual losses until they exit the trade! If a hedge fund guy did this the SEC would ban him from trading and throw him in jail.

  4. They base returns on unrealistic entries and exits, and do not account for commissions. Unless the returns are audited by an accounting firm, there are no checks on the fills obtained by the service. They can pick a day in the past and then they can say they entered on the high or low of the day. What’s worse is that the more people who join the service, the worse the fills you are going to get – Take a look at the option chains for the RUT. You can see the herds of people rushing in and out of positions recommended by these services on the daily volume or open interest metrics. If you get caught in a fast market and need to exit a position quickly, good luck! Hundreds of other subscribers with the same positions need to exit too. And what about commissions? If you have a small account with a broker like OptionsXpress, then you are going to have a big chunk of you money disappearing in commissions (part of the reason I recommend Interactive Brokers and Options House), especially if the services insist on trading a lot.

  5. They assume you can invest 100% of your money in their winning trades. If you’ve ever traded Iron Condors before, you’ve probably learnt that you need to keep the majority of your account in cash for adjustments. That’s not the way the services work though – they’ll calculate their returns based on full investment of the account. If you try and do the same, you will get screwed when it comes to adjusting

  6. And worst of all, they back-test results. This is the most brazen way option services can convince you to join their sites. They simply find a “rule” that has worked in the past, and then post that they’ve made money every year with this rule. It looks great, but how many actual, real dollars have they made? None.

Unfortunately there will always be people peddling these services for as long as there are people willing to pay for them. I’m sure there are people out there who can beat the market, but those people generally aren’t running investment advisory newsletters – they’re running their own funds. Don’t be a sucker.

As always, remember the informal motto of Wall Street – CAVEAT EMPTOR (buyer beware!).

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