Motley Fool Options Review
Motley Fool Options is an investing newsletter that focuses purely on Options strategies. They employ a mix of options strategies, with the stated goal of “helping you profit in the short-term and the long-term – and in bull, bear, or even flat markets”. They are restricted to only trading options on stocks that are part of one of the Motley Fool services, any of their premium stock reports, or from one of the Motley Fool Analysts real money portfolio on Fool.com. They can also trade options on stocks that sold from one of the Motley Fool newsletters, as long as it is within 60 days of the sell recommendation. The lead advisors are Jeff Fischer and Jim Gillies.
A subscription includes:
- Trade Alert Emails: These can come at any time during the day and include all the details on their latest options strategy recommendation
- Options Weekly: Regular weekly email updates from the Motley Fool Options team
- Options U: An extensive collection of educational materials on options trading, from Beginner-level to Advanced
- Alternate Trade Recommendations: In addition to the official trade recommendations, they provide alternate strategies for each recommendation as well.
- Access to their members-only message boards
- Miscellaneous additional content
Options trading is generally considered high-risk. This is true to the extent that most options strategies utilize some amount of leverage. However, Motley Fool Options employs strategies that are relatively conservative. Their goal is to produce consistent returns; they are not trying to hit home runs with high-risk options trading. They employ a mix of options strategies from simple put-writing to more complex spreads and strangles.
Motley Fool Options Performance
Unlike investing in stocks, it can be much more complicated to measure performance for options strategies. Motley Fool Options uses a variety of options strategies, some of which involve buying (or at least already owning) stocks, multiple options legs, rolling (or extending) options, or a combination of them all. They do provide a detailed scorecard for each trade they make for both Jeff and Jim’s recommendations. Each individual trade is measured on both a levered and un-levered basis.
However, in measuring their overall performance they use the simple concept of “Accuracy”. Simply put, this is a measure of how many of their recommended strategies produced a positive return. You can see up to date performance for Motley Fool Options here. Their goal is to have 90% accuracy on all completed trades, and 80% on their overall trades.
Given the nature of options trading, returns on individual trades range from gaining over 100% to losing 100%.
There is active debate on the boards as to what is the best way to measure performance. Arguments can be made that focusing primarily on accuracy is misleading as a way to measure performance as a whole, but there is no one good way to capture the complexity of all their trades in sum. I do think that Jeff, Jim, and team are very transparent and sincere in their thought process (and provide performance results on each individual trade as mentioned), and are not trying to pull one over on the public.
The benefit of accuracy is that it shows you that they are not executing a lot of high-risk trades, and that as a member you have a higher probability of making money on any individual trade, as opposed to Motley Fool stock-picking newsletters where even though they are generally making strong returns, their accuracy is closer to 50% (see my detailed performance stats for Stock Advisor and Rule Breakers).
Motley Fool Options is a unique service within the Motley Fool universe of premium subscriptions. Given the derivative nature of options, you are not directly investing in a company. In fact you are not investing in anything but rather buying and selling contracts. And as a matter of fact, in most options trades you are actively trying to avoid owning the underlying stocks. For an advisory service whose mantra is investing in high quality businesses, the existence of an options service at Motley Fool has been somewhat controversial.
But just like day trading (or high frequency trading) and long-term investing lie on opposite ends of the investing spectrum, there is a wide range of options strategies, from the extremely risky, to more conservative income generating approaches. Motley Fool’s take (and I agree) is that if properly implemented, options can complement a long-term equity portfolio, and provide a steady stream of income.
The Best Place To Learn About Options
Motley Fool Options is a great service by which to learn options trading. In fact, there is probably no better place. They offer their Options U which has great fundamental materials for learning all about options, and strategies from basic to advanced multiple-leg strategies. Each of their trade recommendations takes you step by step through how to place your orders, including discussions of the profit/loss curve, as well as their reasoning on why they picked that trade. And their member boards are filled with a ton of helpful community posts. The education you can gain is probably itself worth the subscription price if you are serious about options investing. In fact, I rarely execute any of the trades they recommend (as I have my own methods) but I continue to learn so much from them that I still follow the service.
One of the biggest differences between Motley Fool Options and their other services like Stock Advisor, Income Investor, and Rule Breakers, is that you really have to pay attention to what you are doing. If you are not familiar with options, you really need to follow their trades word for word. “Buying a put” and “selling a put” are two very different trades and if you get it wrong, you could do some real damage to your portfolio. Using the wrong strike price could lead to similar problems. This is not a service for someone who just wants to set and forget a couple trades. You also need to read their periodic trade updates as well – they often will roll a position into future months and again, if you aren’t paying attention, you could take a loss unnecessarily.
A Word on Portfolio Size
Unlike buying stocks where you can get started with a couple hundred dollars, trading options the Motley Fool way generally requires a larger portfolio size (and specifically a large cash position). “The Motley Fool way” is an approach such that your options trades are cash secured (a.k.a not leveraged). This is the most conservative approach and highly recommended for anyone starting out with options. Without getting into all the details of options trading, if some trades go against you, you can be required to buy the underlying shares of stocks, and so the safest approach is to have sufficient cash on hand to cover those purchases.
An example may be easier to understand. A recent trade recommended selling $52.50 puts for $2.50 in income for each contract you sold. Since each contract is an obligation to buy 100 shares, if you sold one contract you would make $250 in income minus $8 in commissions (on average; some brokers will be lower), but you’d be on the hook to buy $5250 in shares if the price of the stock fell below $52.50. So to do this safely you would want that much cash on hand in your account. And note that the $8 commission is 3% of the income generated which is probably the max ratio you’d want for your trades. And also note that if you do not want to over-allocate yourself to any one stock, and use a commonly recommended 5% as a maximum allocation, $5250 represents 5% of a $100,500 portfolio.
You can always use some leverage as you gain experience (it’s not always a bad thing) that would require less cash on hand, and there are other trades that are recommended, but I would say this is a fairly typical trade recommendation. The abuse of leverage is where options get their bad reputation, and the worst thing you can do is over-leverage yourself and get caught in a bad market. So consider whether you have a portfolio that supports those types of economics.
Motley Fool Options’ main benefit is the educational opportunity involved. If you are new to options, there probably isn’t a better place to learn about them than here. But you do need to stay involved in the service and pay close attention to the details of their trade recommendations or you could quickly experience the downside of options trading.
If you have any questions or comments, please let me know! And I’d love to hear about your own experiences with options trading.
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