In a world full of complex financial instruments, convoluted investment strategies and suspect investment institutions, accurate and reliable performance reporting is paramount.  To evaluate performance reporting, investors must not only understand how the performance returns are calculated, but also understand what is included and/or not included in the reporting.  We make every effort to be transparent and direct in reporting the performance of our trade recommendations.  If you have spent any time looking at other services, you will quickly find that many are not transparent and are frankly, misleading or simply dishonest.  Unfortunately, there are many “tricks” or tactics used to alter, distort and mislead true performance results. See “Why only one position or trade recommendation per option cycle?”

Typically, understanding the index credit spread option strategy, and the fact that profits are not dependent upon market performance or direction, is probably the most difficult conceptual hurdle for most investors to overcome.  Once that is understood, many investors then try to rationalize how this strategy, applied in a very conservative manner, can produce such impressive and consistent results.  One of the most common questions investors ask is “Why isn’t everyone investing in “credit spread” options?”

We pride ourselves on full disclosure and complete transparency.  Since our approach is based on a conservation methodology, we will not have the biggest and more outrageous performance numbers.  Our success and reputation was built on integrity and consistency, not glitz and exorbitant performance claims.  See “Do you have an incentive to produce “big” returns?”

In fact, our subscribers can verify the performance results.  For members who use the auto-trade feature, performance figures can indeed be exactly replicated and verified….no exceptions!!  We only report actual trade recommendations which were successfully executed with our auto-trade subscribers.  Try that with any other advisory service!

The bottom line:  As a member of any advisory service, you must be able to validate and replicate any disclosed performance figures.  If not, we would strongly suggest you walk away…and fast! 

How are monthly performance returns calculated?

We report our trade recommendation performance on a monthly basis.  Our performance figures are calculated on a “return on invested capital” basis.  In other words, your profit divided by your cash requirement:

     Profit (Net Credit Premium)/Cash Requirement = Return on Invested Capital

 
Example:  Let’s assume that an investor has money in their brokerage account.  The investor can designate any portion, or percentage, of their brokerage account to option trading (as long as they can met minimum account size and cash/margin requirements). 

Now, let’s assume that an opportunity exits to execute a “Bear Call” credit spread position (Assume the SPX – 975 and 985 CALLS) which would result in a $50 “net credit” ($50 net credit per option contract).  When executing a credit spread position, the brokerage firm will require the investor to maintain a certain level of cash in their account, per option contract, as a means to secure potential obligations if the options were exercised.  Cash requirements may differ between brokerage firms and investors should always verify trading requirements with the brokerage firm prior to placing any trades.  If this trade executes successfully, lets say the cash requirement for this trade (per option contract) would be as follows:

  (Option Strike Difference – Net Credit) x 100 = Cash Required (per option contract)

In this example, the cash requirements are….

                        ($10.00 – $.50) X 100 = $950.00 (per option contract)

In other words, this investor would be required to maintain “cash” reserves in their brokerage account of $950 per option account.  Thus, in calculating the “Return on Invested Capital” on this credit spread position, the following calculation would be used:

             (Net Credit Premium/Cash Requirements) = Return on Invested Capital

In this example, the Return on Invested Capital is….

                                            ($50/$950) = 5.26%

Note: Our performance figures do not include any brokerage commissions and/or fees.  Nor do our performance figures include Empire’s subscription fees. Our performance figures are based on actual, executed trade recommendation orders through the optionsXpress®auto-trade program.  Subscribers who do not participant in the optionsXpress® “Xecute®” auto-trade program may experience difference trading results, including variations in trade executions and “fill prices”.  Investing in index credit spread options does involve risk and loss of capital can occur.  Please see our Disclosure for more information regarding risks.