Like many of you, I am constantly being bombarded by marketing hype from investment gurus who claim they will make me RICH. And although, like you, my gut reaction is to assume that most of them are charlatans, I too have a greedy spot for the right pitch. So far, though, I've come across nary a one that has delivered on its promise. Not that there aren’t any gurus out there whose advice can make you money. Just that none even comes close to the salacious claims advanced in their promotional material.

My specialty is put and call options, and my greatest skepticism is therefore directed at gurus who sell advice related to this particular investment/trading vehicle. I’ve been trading options for thirty years, both as a floor professional and as a retail customer, and have written on the topic for many publications, including Barron’s, Stocks Futures & Options magazine, and Stocks and Commodities. I am therefore well qualified to give you the lowdown, and it is this: If you’re looking to reach Easy Street by trading puts and calls, you’re in the wrong game. You’ve got a better chance of striking it rich by drilling for oil in your back yard.

Mastering a Few Tricks

So how do I reconcile this with the fact that I put out an advisory each day that emphasizes option trades, along with stock, futures and commodities strategies that frequently employ puts and calls? Very simply, I try to avoid making outrageous claims and instead concentrate on helping you understand and use the best tricks that I’ve learned over several decades. My contention is that, to have any chance of profiting with puts and calls, you need to string together at least three or four such good tricks on every single trade.

This is what we have attempted to do in Google, a $300 stock that can be intimidating to trade. My strategy, buying September 320-August 320 calendar spread a week ago when GOOG was below $300, was intended to reduce the fear factor as well as the risk, and to take advantage of a $326 target that looks to me like an odds-on bet. So far, we have succeeded nicely, since, despite the wild gyrations in the underlying stock, our option spread is up nearly 40% over its $340 purchase price. Moreover, as I detailed in Monday’s edition, the spread has the potential to produce a profit with GOOG trading anywhere within about a 50-point range. And it could conceivably quadruple our initial stake if everything works out perfectly.

Trust Your Judgment

Broadly speaking, though, the best we can hope for is to get just a little edge on each and every trade, and to initiate only those trades that will cost us relatively little if we’re wrong. If there are any trading advisories doing this better than Rick’s Picks, I’d be sincerely grateful to hear about them. Like you, I’d love to be able to sit back and watch the profits roll in with relatively little effort on my part. But I haven’t come across such a service yet – at least, none whose judgment I trust more than my own. In this regard, investors would do well to take Jesse Livermore’s words to heart:  “No sir, nobody can make big money on what someone else tells him to do. I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment.”  The quote, from Edwin Lefevre’s classic, Reminiscences of a Stock Operator, is taped above my desk, and it’s some of the best advice I’ve ever gotten.

Test Their Claims

However, since we all have a weak spot for the well-wrought sales pitch, here are some tips to help you weed out the phonies before plunking down the cost of a subscription:

• Track a guru’s trades yourself to see if they’re as profitable as claimed. This is rarely the case. On Friday, one of the better gurus advised shorting OEX calls for $4.10 or better, stop $6.30. On Monday, the calls traded as high as $6.50, implying his subscribers would have been stopped out for a loss. But the guru seems to have conveniently overlooked this fact in a bulletin he sent out Monday morning. He wrote as follows: “For those of you [who shorted the calls], the benchmark price is $5.30.” Officially, his subscribers are out of the trade, but I will bet that won’t stop him from declaring a profitable exit if the opportunity comes to do so at a higher price.
• When big percentage gains are claimed for short-term option trades, factor in the commissions to see how well the supposed gains held up. Often, the alleged profits – gains of 30%-40% for a holding period of two weeks or less is typical – don’t even cover commissions, much less slippage.
• When big winners are touted by a service, I am inclined to infer that there have been far more losers that went unmentioned.  Ferret them out, and net them against claimed winners.
• Assess the do-ability of trades that are claimed to have worked. Could you have done these trades yourself, and at the prices given? If the answer is yes, this could be a service worth trying.

Trading Schools

And here are some pointers concerning trading schools. Start by being skeptical of the instructors, since they will almost invariably turn out to have been failed traders themselves. This applies to “celebrity” traders as well, even those who have published best-selling books on the subject. Manifestly, these charmers are more comfortable talking in front of crowds than in confronting the physical and psychological demands of trading. If you want to see them really sweat, ask them why they are doing road shows instead of making untold millions trading. Some other tips:

• Ask for hard proof that the instructor’s students have succeeded. We’ve all heard that, of those who try trading, only about one in ten succeeds. In fact, based on detailed, proprietary data that I’ve seen, the true ratio is probably closer to one in a hundred.
• Don’t be fooled by instructors who can make money trading “live” in front of an audience.  Trading on a stage requires a level of discipline that some instructors do not possess when they are trading in a room alone.
• Relatively few successful traders are good enough teachers to impart the requisite skills to others. You should therefore take pains to determine what, specifically, is being taught that will help you make money. Are the teacher’s methods too idiosyncratic to be learned? Remember, simple systems work best, provided you’re willing to put in the months and years it takes to learn them.
• Don’t let anyone tell you it’s easy, or that some automated system is so good that you’ll be able to quit your day job, or that anyone can do it. These are all lies.
• Ask if you can talk with students who have taken the course and spent a year or more trading. Students are understandably bubbling with excitement and eager to try methods that they have just paid thousands of dollars to learn. But how do they feel a year later? The blunt fact is that nearly all of them will have failed by then and gone back to their full-time jobs or businesses.

The most important thing of all is to understand that for traders there is no quick or easy path to success. Any method rooted in discipline and empirical objectivity can work for you, but to master it so that it will do so in a challenging variety of circumstances takes time, money, patience and a rare degree of self-confidence. The goal of success is achievable to the few, but no guru or teacher can help get you there unless you’re willing to do the hard work, and to suffer the attendant risks, yourself.