So I decided to check out one of the services reporting those remarkable returns.
"Cumulative return"? Really?
This service makes one trade per week, using weekly options expiring the same day. The way they present their results is "cumulative performance". They simply add the results of the individual trades together. While technically this is correct, does it mean anything? Would you be comfortable placing your whole portfolio into one weekly trade?
When a newsletter claims a 1,000% return for the year, wouldn't you assume that if you started the year with $10,000 and invested in all the recommendations given on the site, they would now have $100,000? But this is not the case. A lot of services calculate their yearly return by adding together all the individual returns on each trade recommended for the year.
And you can understand why a service would do that – it’s not only simple but, most importantly, it shows off their performance in the best possible light. Hey, if you could do just four trades per month and make 100% a month, why wouldn't you subscribe?
Because you haven’t actually made 100%, that’s why. Not in the way that most people would think about trading or investment returns.
In case of the described service, since those weekly trades are very risky, there is a significant amount of 100% losers. So realistically, you should not allocate more than 2% per trade with this strategy, and even this is a stretch.
Are those returns live?
To add insult to injury, it turns out that the website went public only in January 2015, but they present track record going back to October 2012. They assume (rightfully) that nobody in his right mind would pay over $1k/year for a service that exists only 3 months, but 2.5 years looks better, doesn't it? Of course the track record cannot be verified because the service did not even exist in 2012-2014, but how many people would be checking this? Humans desperately want to believe there is a way to make money with no or little risk. That’s why Bernie Madoff existed, and it will never change.
You should always check if the reported results are live or backtested, by asking the services provider and/or checking the website creation date.
The correct way to report returns
SteadyOptions will always report our returns based on the whole account. The performance of the model portfolio reflects the growth of the entire account including the cash balance. Some services consider a $1,000 gain on a $1,000 investment to be a 100% return when the whole account is worth $10,000. SO considers this to be a 10% return — and that is the honest way of doing the calculations.
There are a lot of other dirty tricks that some services use to push up their numbers. It might include reporting based on "maximum profit potential", calculating gains based on cash and not on margin etc. You can read my article Performance Reporting - The Myths And The Reality for full details.