Option Trading Scams

Option Subscription Services to Avoid

Although it's tempting to list specific option subscription services that I believe are trading scams, I've chosen instead to provide a checklist of what to avoid when considering subscribing to a service. That keeps me out of legal hot water and enables you to apply the criteria listed below to any trading service you're considering using.

Trading Scams is a subjective term anyway. Option trading services don't have to engage in actual fraud for me classify them as scams. They just have to have the capacity (or likelihood?) to lose their subscribers a lot of money.

Remember the 3 crucial questions I ask of a valid options trading service? Well, consider the checklist below to be the inverse equivalent.

Here are 6 warning signs that a trading service is most likely a trading scam:

#1 - The claims are too good to be true

It's an old adage, but a reliable one--if it sounds too good to be true, it probably is. If a service claims (they usually merely suggest or imply to avoid their own legal hot water) that you can take a small sum like $1000 and turn it into $100,000 or better yet, an automated stream of monthly income enabling you to quit your job and live near a warm body of water, chances are it's a trading scam.

#2 - Any mention of "secret strategies" or references to strategies that professional traders or brokers "don't want you to know about"

There are no "secret strategies" or option trading secrets although there may be strategies you're not familiar with. And those big bad professionals? They really couldn't care less what strategies you employ.

As I've said elsewhere on this site, trading options is essentially the trading of risk. Some strategies are more complicated than others and some may have a more appealing risk-reward profile based on your own trading/investing personality, but understand this common denominator: the higher the return you seek, the more risk you're going to have to assume to achieve it.

I do believe that making 100% a year is possible (full disclosure: in my best year, my returns were 61.92%). If you're willing to risk your entire portfolio, theoretically you can make a whole lot more than 100% a year. But what do you think the odds will be that you'll have anything left to trade with in 5-10 years?

#3 - Long calls or long puts only

Beware any option trading service that provides (onsite or via email) a list of calls or puts for you to simply buy and then just wait for them to double or triple in value.

These may be easy trades to place, and you may occasionally hit one out of the park for a major triple-digit profit, but you're going to strike out a lot more. And striking out in the options market means more than just walking back to the dugout and waiting for your next at bat--it means losing a substantial amount of money.

Let me put it more plainly: paying someone to give you a list of calls or puts to buy is, to me, the same as paying someone to give you a list of lottery numbers to play.

In general, simply buying long calls or puts as part of a routine trading strategy is a pretty lousy approach. There may be a place for the strategy in special situations where you have a high degree of certainty that a stock will make a big move in the very near term (and as long as that view isn't already priced into the options), although there are arguably better strategies there as well, such as the straddle or the strangle.

But the premise of this approach - that you can tightly limit your losses while letting your big winners run up huge profits which will more than offset your losses - is extremely difficult to pull off.

Any service that promotes this idea, in my opinion, is just looking to grab you for a month or two until you wise up (a shrinking brokerage account usually has that effect on people).

#4 - Sites or promotional emails that only list a subscription service's recent winners

It's not that I'm questioning the validity of a service's winning trades. After all, trading options can result in monstrous gains on a percentage basis.

But my "trading scams" radar really lights up when I get an email listing five or more "recent trades" where I could have earned tremendous double and triple digit returns in a matter of just days or weeks.

What I would find immensely more valuable is what that email always fails to include - a list of the service's "recent losers." And I can guarantee you, that list would be much more interesting and a lot longer than the winners' list.

#5 - Lack of transparency

Any option trading service that isn't a trading scam will provide some sort of transparency of results or access into the service's workings.

Transparency doesn't always have to mean verifiable performance and track records. After all, some option services don't provide actualy picks or trading recommendations. Some services simply provide tools that are designed (and marketed) to make you a better trader.

So transparency may involve other criteria such as how much additional educational content, resources, newsletters, blog posts, etc. does the service otherwise provide?

You can learn a lot about online services or sites or organizations (and how serious and legitimate they are) by evaluating the quantity and quality of the complimentary materials they provide.

#6 - Wanted: Lazy Investors

Trading scams are notorious for offering out of this world returns for pretty much no effort on your part. Now, I've never been a fan of Puritans, or their work ethic. I believe in working smarter, not harder. But still, I believe in working. What I don't believe in is "get rich quick" marketing hype.

You don't need a day-trading mentality or devotion to every real-time squiggle on a stock chart in order to make good money with options.

But the realistic option trader is willing to put in the necessary time and effort to actually learn how to trade profitably. And, sorry to have to be the bearer of bad news, but it's probably going to take more than "twenty minutes a month."

Final Thoughts

Option trading services are like any other kind of service. Some provide value and some don't. The ones that do provide real value stick around and gain a credible reputation and loyal following.

And the ones that don't eventually go away. Unfortunately, they keep coming back under different guises. The trick is figuring out which is which beforehand.

The above is my attempt to assist you as you go about making your own assessments and comparisons.

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