Consumer Report/Review Sheridan Mentoring – The Art of Options Income Trading

by R. Wiegand

in Blog,Consumer reports and reviews

This article is a Consumer Report/Review of Dan Sheridan’s mentoring program.  As a matter of disclosure, there are no hidden agendas here – I receive no compensation from Sheridan Mentoring or from any of his competitors (either directly or indirectly) for writing this article.

Dan Sheridan is very entertaining, especially in the world of trading mentoring.  He reminds me of Charlie Sheen from Two and a Half Men, (he even looks a bit like Charlie Sheen), sometimes leading his nephew Jake (read mentoring students), down the road of temptation inadvertently while maintaining a rough and direct edge that is characteristic of experienced former pit traders. As an experienced trader/investor (not to mention that I’ve taken quite a few courses on trading during my career), I was willing to try out Dan’s ideas – which I did during the course – while keeping these trade ideas very small – maintaining a healthy mix of experimentation and skepticism.

I enjoyed every one of Dan’s classes much like every trader likes to hang with experienced and successful traders, hearing their carefully chosen words of wisdom. The course itself is is well thought out and it is hands on.  Students get to try out Dan’s new options analytic software called OptionNet Explorer during the six weeks of the course at no additional cost.  This software has the look and feel of OptionVue – indeed, Dan was a veteran user of OptionVue for many years – which is a powerful options analytic program.  You can create and back-test all the options strategies under the sun, with first rate visual graphics.

Sheridan_OptionNetExplorer

Sheridan_OptionNetExplorer analytics

Like OptionVue, OptionNet Explorer hooks up to real-time data and you can now send your trades directly through to TradeMonster. The back-testing is great when you want to see how a particular strategy or series of adjustments would have fared in the past (you can try them out in up, down, sideways, volatile and quiet markets) by tapping a database of historical options (mid-point) prices that is updated every half hour.  Hypothetical or actual trades can be saved to a trade archive for any number of real or simulated trading accounts.  The historical database is great for traders who want to see how they would have done if they took profits once their target % yield objective has been hit during the trading day at half-hour intervals (as opposed to viewing end-of-day historical performance as is the case with the TOS backtester).

Dan’s course jumps right in with a series of theta (income) options trades across the major benchmark stock indices as well as a few actively traded issues like AAPL, GOOG, or IBM.  Your homework is to recreate all these trades in OptionNet Explorer and track them daily – adjusting or closing out positions when specific price or profit target levels are hit.  As the course progresses, you’ll begin to notice how trades are supposed to fit together as part of a well-crafted options income portfolio – with specific percentages allocated to market or delta neutral vs. slightly directional as well as to vega positive and vega negative positions.  You also get some exposure to Dan’s monster options trade in the Trading the Greeks module of the course – which is a 15-plus legged options beast of a position that somehow you’re supposed to manage during the life of the position and then somehow surgically lay to rest as expiration nears.

If all these options concepts sound Greek to you, then I don’t think you’re ready for any of Dan’s courses.  He is much more suited to intermediate and advanced options traders.  (For beginner options courses I would recommend the folks over at OptionVue who run a rigorous curriculum called DiscoverOptions designed for beginners to advanced options trading mentoring).  (There are a number of options courses out there, and perhaps someday I’ll get around to reviewing them).

I have not taken any of Dan’s advanced mentoring programs (which are one-on-one personal coaching courses where he supposedly helps you get your whole trading game plan together and then makes sure you follow it), so I can’t comment on just how successful students are that graduate from it.  But I have heard good things about both Dan’s advanced programs as well as DiscoverOptions personal coaching and mentoring programs.  One of the key differences between the folks at DiscoverOptions vs. Sheridan Mentoring is that the former is comprised of a group of successful traders, whereas with the latter, it’s essentially Dan.  For those who want a bit more diversity (being able to contrast, compare and multiple trading styles), it’s better to go with DiscoverOptions.  Also, keep in mind that these are the guys (Len Yates and Steve Lentz) who designed and developed OptionVue – one of the premier, if not the best options analytical software programs around.

As an example, Dan comes from an options market maker background at the CBOE (Chicago Board Options Exchange).  He is a non-directional (“theta hunter” to use his own words) type of trader.  In the first week of class he asks every student to leave their directional biases at the door.  So the assumption and focus is on time decay (theta) – not on having a view of which way the market is going.  Indeed, since markets rarely sit inside of pre-determined trading ranges (what every theta trader salivates over), the key to success is knowing when and how to adjust the painful sides or legs of option spread trades.  If you don’t adjust as an options trader you’ll get killed.  Dan’s responsibility to his students is to make sure everyone knows how to do a half-way decent job adjusting – otherwise he’s just like Charlie Sheen leading his nephew Jake down the wayward path.  But as I try to explain in one of my previous articles on option income trading , I personally prefer to take a directional view -because I’ve spent many years developing what I believe to be a viable directional model for the equity benchmarks.  Bottom line, if you have a solid directional model, use it.  If so, why bother with market neutral theta hunting, or options at all for that matter?  (You can and should use leveraged ETFs or futures instead of options if you follow a directional model due to the much higher commission and slippage costs associated with options – not mention potential margin difficulties that options spread traders encounter when un-winding a 15-plus legged beast of an options position).  Don’t believe me, try out one of these Frankenstein positions for yourself sometime – only please remember to keep each leg as small as possible.  And try not to snicker every time you have to your adjustment levels are hit.  (I did exactly that as I tried out one of Dan’s monster Managing the Greeks trades).  At DiscoverOptions, you’ll get a more of a directional palette than at Sheridan mentoring as well as an appreciation for simplicity – because in this business, often the simplest approach is best.

A Brief Bio of Dan Sheridan

Sheridan was an options market maker at the CBOE for over 20 years and traded equity options for a hedge fund called Mercury Trading along with Jon Najarian and racked up a few years of stellar returns, employing market neutral theta options income trading strategies and taking advantage of much wider option bid-ask spreads than is prevalent today.  In The Art of Income Trading, one of Sheridan’s mentoring programs, he conceded to his students that Mercury Trading closed down when penny-wide bid-ask spreads entered the scene and the hedge fund had lost its edge.  This prompts the question as to whether the stellar returns from Mercury Trading were more from expert market making skills than from the implementation of the income option strategies taught in his course. Why close down a successful hedge fund if these options strategies are supposed to work?  Aren’t the 6-8% per month target returns that his course says are do-able for intermediate to advanced options traders sufficient to keep hedge fund investors happy?  Why not keep Mercury Trading going instead of running an options mentoring program?

My best guess as to why Sheridan has chosen the tutorial path instead of continue to trade for Najarian may be that Sheridan and Najarian have always hedged their bets with commission or slippage via the brokerage community in some way. This is what truly gave them an edge – along with the occasional explosive spec trade (e.g. time bomb butterflies or otm calls/puts during earnings season – strategies that have very little if anything to do with option income trading and more with direction).  Both Sheridan and Najarian trade for their own personal accounts – so they put their money where their mouth is – however, both are affiliated with brokerage firms either directly or indirectly (TradeMonster, ThinkOrSwim or TOS as the latter brokerage firm is referred to as).  In fact, Sheridan’s brother at one point was one of the directors at TOS – I don’t know whether he still is after TD Bank bought out Tom Sosnoff’s options brokerage firm.

The point is that the benefits of running a diverse portfolio of options income spread trades appear to me to be more in line with brokerage firm’s bottom lines than with those of individual investors. That’s because options spread trades are multi-legged and span a wide range of strikes and expiration months – which brokers absolutely love because it means a higher number of trades, meatier bid-ask spreads at the wings, and greater liquidity for all.  While it is certainly possible to make money with Dan’s option income trading approach – only a select few of his students will be successful over the long haul.  My best guess is that around 5-10% of his students actually average 4-6% per month after at least one year of breaking even, 50% of his students break-even after a year of trading and then give up, and the remaining 45% or so lose money consistently and then give up.  (While this data is not readily available, it is based on the feedback that I get from other students taking the course, their skill level and experience trading, as well as my own experience trading and back-testing the viability of these strategies).

Don’t let the lure of 4-6% monthly returns fool you.  In reality, they are likely to be even lower not only due to the cost of slippage and commissions but also because of the fact that you can only commit 50-75% of your equity to options trades  (due to the cash levels that you must have on hand in order to adjust positions as well as to the much higher risk of ruin due to the leverage effect of options).  That’s perhaps the subject of another article sometime.  For now, the message here is the same message that I give in my previous article on options income tradingcaveat emptor – let the buyer beware.

 

 

{ 10 comments… read them below or add one }

Peggy July 5, 2013 at 2:53 AM

Let me say a few words about Optionnet. I’m Dan’s student.

The way I see it – Optionnet is more of a learning and teaching tool than an analysis software. The software allows mentors and students to look at and analyze a trade together.

If you are Dan’s student and a beginner who follow closely Dan’s trading strategies, then you will feel strongly that it is the best option software in the world. It is specifically designed for this purpose.

But if you trade in other ways, then the software won’t be very useful and the way it is designed can even cause frustration. That’s the reason why Optionnet is popular among mentors and beginners. Many more advance students adopt commercial software, like Optionvue.

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R. Wiegand July 5, 2013 at 4:15 PM

OptionVue’s data is also very reliable. I’ve only used Optionet during one of Dan’s classes when it first came out – it has a very similar look to OptionVue, but I remember there being a few bugs in the software. As you suggest, if you’re a big time options trader you probably can’t beat OptionVue.

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Eric G June 19, 2013 at 4:21 AM

Although I haven’t paid a penny for Dan’s classes or mentoring, I am gratefully thankful for the hundreds of classes that he has given free of charge. I’ve only met one of Dan’s students who was highly successful trading iron condors and managing quite a large portfolio of clients. Dan himself admits that for the majority of traders, one bad month can wipe out the past 8 good months, WITHOUT RISK MANAGEMENT! The only true risk with options, that absolutely nothing can be done about, are MARKET GAPS. Even if I have a sell order in, the market could gap overnight, putting my short strikes deep in the money. But statistically, these GAPS do not happen very much. As a risk management strategy going into it, what’s wrong with ALWAYS buying far out of the money spreads as insurance for when the major moves happen. Or, in an iron condor, consistently rationing, so that the position is net long? 10 short for 11 long doesn’t take away much premium, but during the major market moves, it can save the big losses.

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R. Wiegand June 19, 2013 at 9:50 PM

Thank you for your comments. I would agree with you on your suggestions with how to deal with gaps and violent moves in the markets. Based on my experience trading condors, you really need a solid timing system to preserve capital – even when your rationing or scaling in the left or the right shoulder. If you do have some timing skills, you could do worse than to scale in one shoulder at a time (or bagging the painful side altogether). This is much preferable than to having both shoulders on at once, because experienced option income traders know that you can’t put a condom on a violent market. Delta hedging and the like, or taking off a painful spread during the heat of battle can be a daunting task for all traders. Options, as you know can get very sticky and costly (once you factor in slippage and commissions) as well. I wish you all the best.

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Summersnow March 4, 2013 at 11:05 AM

Dan’s program is a great way for one to get started with trading options consistently. However, it is for those who are prepared to spend serious time with it. Otherwise, don’t bother.

On OptionNet Explorer. I have used both OptionNet Explorer and OptionVue. OptionNet explorer is good in the beginning to learn options trading but the software is quite inaccurate in its greeks calculation. When you start to trade some serious money, it’ll be dangerous to depend on OptionNet. OptionVue would be better. OptionVue is more expensive but if you’re trading for a living, then the error you make based on OptionNet will be more than enough to pay for OptionVue.

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R. Wiegand March 4, 2013 at 11:15 AM

Thank you for your feedback and comments. That’s good to know.

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Jeff P November 10, 2012 at 11:19 AM

Dan’s information is very useful. It’s not for the timid or newbie. IC’s work the best using RUT. I’ve been making 3-4% a month for several months. You do have to learn how to adjust to make this work. However, it does work. I’ve not paid for the mentoring, the PPTs at CBOE and Dan’s occasional online presentations are very helpful.

TOS has ThinkOnDemand for “real” money accounts. This provides trade history on EVERY trade for the past 2 years. It is great for backtesting.

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R. Wiegand November 10, 2012 at 11:32 AM

There’s no question that the Iron Condor strategy works during quieter (low volatility) periods, as we’ve been experiencing during the past few months. Just have a look at the Vix over the past few months. You say that you’ve been making money over the past several months. But one must then ask, have you been making money with this strategy over the past 3-5 years, even with your adjustments? All it takes is one bad month to wipe out 10 months of profits…and as I suggest in my blog post, options have much wider spreads than stocks. Combine that with the margin requirements and you have very sticky (illiquid) instruments indeed. My experience suggests that the market neutral trader is asking for serious trouble, while the directional trader (with a competitive directional model) can do pretty well.

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Greg Hoza June 11, 2012 at 1:12 PM

I am a Sheridan student and I would like to know where you got your 5-10% success at 4-6% monthly income? I for one made money while I attended one of Dan’s Monthly Income trading classes – enough to more than pay for the class. I have the software and find that it is superior to anything I have seen in the options world. If one follows Dan’s advice on how to set-up, tweak, adjust and management trades then the odds are against you for loosing money as his non-directional style trading is based upon odds and mathematical statistics of having successful trades. I bet those who did not do well who you were in contact with from Dan’s program did not follow his advice but nevertheless blamed him for their own folly. Please be more specific as to how you came up with 5-10% success at 4-6% monthly income, otherwise you should remove this blog from this site as it is not representative of the truth about Dan’s program.

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R. Wiegand June 11, 2012 at 11:42 PM

OptionNet Explorer is a great options analytics software program – I do not disagree with that. Whether it’s better than OptionVue is another question.

On the matter of student performance, there’s no way to know exactly how Dan’s students from the Art of Income Trading actually perform – unless you survey them and or better yet, have their options trading accounts audited. Isn’t performance the bottom line? If actual results were better than break-even, wouldn’t Dan want to brag about them? and I’m not talking about paying some folk to lie about their performance either. Fact is, I’m no beginner when it comes to options trading and trade adjustments – and if I had trouble breaking even with these theta strategies during volatile markets I can only imagine what the neophytes are going through. My message is for the average investor out there – options are extremely sexy, dangerous beasts that will suck the lifeblood out of you like a vampire. Show me your audited results over a 5-year period and prove me wrong if you can. Else I wish you the best of luck with your options income pipe dream.

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