A more advanced option trading service

Of course more advanced means more expensive. More than $4K CDN start up plus some access and commission fees as this is a broker/trader platform that only works with one broker...and it is a US company. Now, they have a track record in the sense that they have been around since 2000 or so and I can back test to 2004.

The core assumption that the system is based on is that close to 75% of all options sold expire un-exercised...this is a loss to the buyer and a gain to the seller. That alone is quite an edge over just buying options. I sort of knew that I was going to need to get into selling options in order to secure a smoother cash flow and I also knew that a lot of options expire worthless...but I didn't know the numbers.

The second assumption is that big winning home runs are not looked for. They promote the idea of very tight risk management that will, by it's nature, provide a good return compared to any other investment vehicle. In this, compounding, even though they don't mention it, will turn a small account into a decent size rather quickly.

The strategy is sound and my back testing has yielded an over all win rate higher than anything I have back tested yet... in fact in 2009 I have yet to produce a single losing trade. Looking at their strategy, this is plain to see why. The only "worst case" scenario involves a huge run up or sell off in the market and I think that they tweak things to accommodate this on the fly, somewhat.

I was able to create some large losses in September last year as there was a bad run down in the market which fell outside of the current strategy parameters...it may not have been near as bad as I tested as I was just going with current settings and strict exit criteria. Pulling out of the hole that I virtually dug in September and October took me until May or so. I must admit that a hole in a mutual find account would still be there. Plodding along doing the exact same thing for each trade using the same strategy and same index (I won't get into what they trade but suffice it to say these are not stock options) worked. I expect that I could have mitigated the loss by not trading when risk factors were high in that month and boosted the returns by selecting trades that had higher risk/reward numbers initially and shorter time lines.

They have a 30 day money back exit guarantee and a 10 trade guarantee to have the initial fee reimbursed while still staying with the program. Now they specify which trade strategy that this guarantee applies to and I can see that they are next to guaranteed that they will never have to pay me back should I sign up. But, in that case I will have paid for it through trading anyway... win, win.

There are downsides to even trying this as it is a US company and I am not sure how the taxation applies to me yet. They do let me paper trade the service for free first, which is nice, but setting up an account through them could be onerous and I may have to do some sort of online US banking.

They use a proprietary formula to determine trade entries, exits and monitoring. The trades are complicated enough that I would not really want to have to try to set them up myself, at this point. Commissions alone in my current account for a single trade would amount to $152 USD. The paper trade setup accounts for commissions through their system so my testing is not "frictionless".

The trading appears to be easy enough. They make about 10 recommendations each day. I select the style of trade from three styles, select the size of base trade and pick which ever one has the shortest duration, select how many units and hit "Trade"... more or less. Then check the position each day to determine if is remains a keeper or to close it due to high risk factor. They look after making the corresponding trades (up to six trades for a single position) and send a notification as to whether the trade was filled or not. Oh, there is an allowance for how far outside the trade prices that I am willing to go to get the trade filled.

I think that there is also an automatic exit setup that will close a trade at a certain point that I determine ahead of time as well, sort of a stop loss even though that is easily looked after by checking myself.

They make their money from the commissions, data fees (loosely speaking there are data fees monthly) and I don't doubt that they take some from the spreads during the trades as well.

All in all this looks like a decent system and I am seriously considering trying it. There would be a significant cash outlay to test this though. The 10 trade guarantee uses minimum trades that are in the $16,000 range...US. I cannot do this through an RRSP so there would be tax implications in the spring. My 10 trades would take about 10 months to complete if I were not able to do multiple trades, which I won't. Putting up $20K seems like a lot...but how much have I dumped into mutual funds hoping for the best? My wife has just given me the OK to transfer her RRSP account to trade but I really hesitate to do that just yet. My RRSP is play money, hers is not.

My other option would be to dump $10,000 USD into this and go with the smaller trades, about $1000 per trade and run them like a laddered GIC plan, one trade per week and roll them over as they expire or close. I would consider the $4K cost as a trade deficit to start so I would not be tempted to pull cash out for anything and I could continue with my RRSP and TFSA trading in my CDN account.

I am torn as I see the huge long term potential here.

I have been in one of their webinars, done some serious playing in a test account and have booked another webinar next week. Overall I have about 6 hours into this so far. I think that this company is willing to spend the time to get anyone up to speed and help facilitate the account setup and funding...after all, it is their business.

Jeff.