I have learned about five new "premium" options trading newsletters that just went under during the recent October super rally, with account draw-downs between -40% and -80%. Yes, beyond the point of recovery. Sadly, they have wiped out huge parts of the life savings of many naive traders. And I'm just counting the ones that readers have talked to me about. Of course there are dozens more out there. The Cemetery of totally blown up Credit Spreads/Iron Condors newsletters is full of corpses, more than I can remember after 5 years writing on this site.
What's a wise trader to do with this information?
Obviously, learn from it.
There is something common in all these wipe outs, from which we can extract concrete valuable lessons:
- They always, always, always happen during market rallies. Market sell offs are much easier to defend, as they allow for much more comfortable adjustments in terms of both new premium and much greater distance away from the money. So, fear the upside more than anything and avoid the aggressive Call selling activity.
- The reluctance to take a manageable loss and delay adjustment points, or not make adjustments at all is what eventually devastates all of them. I haven't seen a single wipe out where the newsletter kept making adjustments early. When you defend early, you can afford to adjust 3 or even 4 times without wrecking your positions. Yes, sometimes adjusting early is frustrating, in fact most of the time it is, as you see the market reverse leaving your original position as a full winner had you not done anything. But it is the price to pay to guarantee long term survival.
- All these newsletters showed spectacular yearly returns where it was common to find +40% to +70% returns year after year. Every time you see this, absolutely every time you see this, something is wrong. Either they play too many highly correlated positions at the same time, where risk is concentrated in similar spots giving a fake impression of diversification of risk; or they are not defending their Credit spreads and Iron Condors, or they delay the adjustments way too much; Or they are doubling down on every losing position. In many cases they have simply been lucky in the past: price has penetrated their short strikes, they have allowed it without defending, and it has later reversed. The unwillingness to adjust the original position has ended up well. But eventually luck runs out. It ALWAYS does.
- In many other cases the track records have been manipulated to some degree: Either showing past years of supposed successful trading activity where "the service" didn't even exist. Or by reporting better entry and exit fills. No commissions, or just making assumptions that there is no cash set aside in the portfolio and it is all in every time, or there is just very little cash set aside. This inflates of course the returns when seen at an account level. Or they are simply reporting results in a way that just makes them look good without being "totally dishonest" (read more about that here)
- They all have attractive marketing slogans i.e "Best in the Biz. Period". mmmmm,..says who?? C'mon, you have to try harder than that. We're too old to be falling for this every time.
Keep an open mind to constantly learn from others' successes and failures.