What makes Option Pit different than every other option mentoring service? Is it because our Director of Education is smarter? He might say yes, but most would say no. Are we the best because we have some sort of secret strategy that makes us superior to every other firm??? Not really. What makes us different is that we do not perpetuate the biggest lie in the business: Doing the same trade every month in and out is the best way to trade. Take a look at this trade:
It is a RUT Iron Condor with 59 days to expiration. This is the bread and butter of the options education industry. “'Throw this trade on every month, and over time you can make money." This is simply not true, it is important that one enter a trade when conditions are proper, or at a minimum, not bad. Anyone who has every really traded can tell you this: picking an entry point is more than half of the battle in a trade.
The chart below has 3 data sets of returns using the 80% success rate presented in the Iron Condor above:
Set one is our control group. The control group enters a trade and holds the trade until expiration. Based on the probabilities one would lose more than the entire initial risk investment over a 5 year period. When assuming a 1.5 dollar a contract commission, one starts to approach losing 2X the cash flow.
Data set two is an iron condor with adjustments. I conservatively assumed that on the winning months the trader would collect, on average about 55% of cash flow (this number is likely an overestimate, but I wanted to place assumption that worked against my conclusion as much as I possible could). I also assumed a maximum loss of 1.5X cash flow on the losing months. Before commissions, the return is acceptable. Over a 5 year period, 820 dollars of risk returns a gross profit of 1260 dollars, about 1.5X our cash flow. Now the punch in the stomach, our 8 contracts a month in and out (4 entering 4 exiting) causes gives us a commission of 720 dollars over a 5 year period. After commission, what was a nice return leaves the trader a net of only 540 dollars over 5 years. Hey, it’s better than nothing, but I loathe situations where the broker makes more than the trader.
The final data set is the same set as data set two except one major difference. We took 12 months off during the data set and assumed that 1/3 of those months, 4 instances, were months that we would have hit our maximum loss. Notice the difference in the returns, in both gross and net profit. Over a 5 year period the trader nets more than 1X his or her cash flow. Part of the change is the fact that the trader avoids bad situations (see April 2010, and September 2010). The other part is the several hundred dollars the trader doesn't blow on commissions.
Now, this is just a made up set of numbers that I could manipulate in any way I really wanted. But no matter how I manipulated the numbers the net profits don’t lie. One would have to assume a very tight maximum loss, and an incredibly high percentage of cash flow collected in order to make this set come up with any different results. The truth is anyone perpetuating the month in month out approach is cooking the books.
Call us crazy, call us insane, as long as you including truthful in the description. In the end, not every trader is cut out for being an option trader; those that are cut out for this industry are likely looking at a set more like number 3 as approach over data set 2. As far as I can tell, we are the only mentoring group that attempts to teach set 2. Its just as much timing the trade as it is, time in the trade all you long theta/income traders.
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for more information on trade selection check out my 2 part piece from October and December I wrote for SFO Magazine.
