OptionsXpress

We spent the better part of the day at a seminar about the new Blocks software from Worden Brothers. It is very cool, and I will write more about it later. First, though I wanted to mention that OptionsXpress keeps coming up in conversations that I have with other traders. They have a lot of tools for regular stock trading in addition to options trading. Plus they have that Virtual Trading Account that I mentioned a few days ago. Definitely something to look into. Follow the link to see if OptionsXpress works into your trading workflow, and then post a note letting us know how it worked.

Optionetics Mentoring Program - Lesson 2

Our lesson this week has been an “Introduction to Options”. The workbook explained the basics of options, which I won’t go into in any detail. We are starting to do better with the vocabulary. It’s one of those things that we need to have a good understanding of, but I think that we will only really grasp some of these concepts once we start working with them. We have been watching the DVDs that came with the Wealth Without Worry series to help round out our introduction.
Risk Graphs
Both the DVD and the workbook introduced the concept of Risk Graphs. I’m guessing that Risk Graphs are a tool that Optionetics uses a lot. I like to see things visually, so graphs are a good thing. The main concept shown on the graphs is the fact that options limit your risk to the price of the option. If you buy an option for $2/share, the trade can go in the opposite direction from what you expect and you still can only lose that $2. That protection comes at a price, though. If the price of the underlying stock does not move at all, you still paid the price for the option, so you have lost the price of the option. That means that the price of the underlying stock needs to go up by an amount equal to the price of the option before you start making money. My biggest concern at this point is that with options (at least with buying a call) you not only have to be right about the direction that the stock is going to move, it also has to move enough to pay you back for what you’ve paid for the option before you make a profit. It seems like you would get similar protection by using a stop/loss without the additional cost. With a stop/loss you have the potential that the price will gap through your stop/loss level, so you could potentially lose more than what you had planned for, but I’m not sure that the additional risk is worth the price of the option. We will have to see how they put together strategies.

Optionetics Mentoring Program

We had our first mentoring phone call this week. We were a little apprehensive, not knowing exactly how this was going to work. We kept asking ourselves, if someone is that successful at options trading, why would they take the time to do over-the-phone mentoring. We hope that the answer is the mentors have a real desire to teach. Our call started a little late due to our mentor’s previous caller being completely clueless about using his computer. We went over some “housekeeping issues” such as names, addresses, e-mails, etc.; all information that they should have had and could have verified in a much more productive manner than taking up part of our mentoring time. We had e-mailed in a Pre-assessment Questionnaire earlier in the morning, but our mentor had not seen it yet. It would have been helpful if he had reviewed it before the call, but I didn’t give him a lot of time to do that. We went through the questionnaire item by item and he was very good at commenting, answering questions, and generally recognizing from our answers some of the issues that we may run into with options trading.

Trading Account
One of the first questions that I had was about setting up a trading account. We have all of our other investment accounts with TD Ameritrade, which rated high on the reviews on the Optionetics website. I had a little trouble setting up the account, because I was trying to set up a specific account, apart from our other investment accounts that we would reserve just for options (at this point). To set up an account that will allow for anything but the most basic options strategies you have to have a margin account. Because we already had a margin-enabled account with the same ownership, TD Ameritrade would not set up a second account. I considered opening up another account at another brokerage firm but realized that I could solve the problem by deactivating margin on our other account.

Most of the people I’ve talked with at Optionetics recommend OptionsXpress for a trading account. They have a different fee schedule from TD Ameritrade which makes it more difficult to compare apples to apples. TD Ameritrade charges $9.99 plus $0.75/contract (100 shares) while OptionsXpress charges $1.50/contract with a $14.95 minimum. That means that with all else being equal (which they’re not) TD Ameritrade is cheaper for less than 7 contracts. Probably more important than pricing, though, are the tools that each service offers. Unfortunately, at this point I don’t know enough to understand all of the differences. The nice thing that OptionsXpress offers that I would use right away is a Virtual Trading account. Our mentor suggested signing up for an OptionsXpress account, even if we don’t fund it, so that we would have access to the virtual account to try “paper trading”.

Money Management
It soon became clear in our conversations with our mentor that we are very interested in using options to reduce our risk. It’s one of my pet peeves when people compare trading options to stocks and say that with stocks you might earn a 5% gain while with options you would earn a 100% gain on the same trade. The only way comparing a 5% gain with a 100% gain is valid is if you are putting the same dollar amounts into each trade. It makes no sense when you consider the additional risks involved with options. While you might invest $10,000 in a stock, you would be foolhardy to put the same amount into an options trade. With options you can (and likely will) lose your whole investment on a good portion of your trades. That doesn’t happen very often with buying stocks. The key is to invest a much smaller amount in the higher risk options while putting the remainder of your investment capital in a risk-free investment. Our mentor suggested that Optionetics recommends not putting more than 5% of our account in one position. With a 50% stop loss, that limits our downside on that position to 2.5% of our account (unless the stop gets blown away, which is always a possibility). He thinks it’s better to limit the risk in any one position to 1-2%. He also recommends only risking 10-20% of our account at one time. That would imply 10 positions.

Limitations
As part of the Questionnaire we had to share a list of our limitations. We came up with the following. I felt that he had some good observations about many of them.
1. Somewhat risk-adverse. As we discussed above, there are strategies which will limit the downside-risk. He suggested that we might end up developing an “income style” of trading rather than working with “directional” trades. That is something that will come later on in the program, though.
2. Tend to focus on the losses rather than the gains. He suggested that many traders tend to pull the plug on winners too early and let their losers ride with the hope of the trade turning in their direction. Instead we should structure our trades with at least a 2:1 reward to risk ratio. That way even a 50/50 success rate will give us a profit. I still have somewhat of a problem with this concept because it only factors in the potential gain/loss, not the probability of each happening. You could structure a trade that has the potential to earn twice what it can lose, but have a greater probability that it will hit your loss target and still end up losing money in the long run. We’ll see how it plays out.
3. Tend to get caught up in the details. Details can be a very positive thing if it doesn’t lead to Limitation #4 below.
4. Tend to get immobilized by insufficient data. He called this “Analysis Paralysis”, which I thought was very descriptive. I have a hard time making decisions on incomplete information. I know I’m not alone in that. Unfortunately, there is seldom complete information when trading. As Don Worden has of Telechart has suggested, if you had complete information there would be no risk, and risk is what traders get paid for. The solution is to set up a trading strategy and stick to it.
5. Tend to be skeptical of strong, positive moves in the market. I tend to think that strong upward moves in the market mean that it is overpriced. Our mentor suggested that our job is to recognize what the market is doing, not to judge whether of not it is rational. The market regularly has strong moves that are not rational. We need to set up a strategy that will trade with the trend in the market, but be prepared to pull the plug if the market changes direction.

Optionetics Mentoring Program - Session 1 Homework

As part of the Optionetics Mentoring Program we have received several learning resources. First we received the course workbooks, which came in heavy plastic cases that looked more impressive than the ½” thick spiral bound books really were. Each of the two workbooks (Silver Series and Gold Series) came packaged with an audio CD that was basically just more sales pitch for the company. I don’t have any problem with sales pitches, so that is not necessarily a negative observation. It’s just that when I saw the DVD I was hoping for another learning resource, so it didn’t meet my expectation. We also received a CD of the software Profit Source, which is a service that has an additional yearly subscription fee if we chose to use it. It comes with a 30 day free trial so we were advised in the literature not to load the software until after the third training session to make the most of our trial period.

We did the first session in the Silver Series workbook to prepare for our first call from our mentor. It seemed well laid out and was designed to get us to think about our goals and risk tolerance. I am a firm believer in taking the time to plan and write down goals, so it was a very worthwhile experience. It was especially worthwhile since both Julie and I are going through this program together and will be investing jointly. It is helpful to work out our expectations at this point, rather than in the heat of trading. I am amazed at how many husbands and wives do not share in the responsibility of investing. It’s a huge responsibility to put on just one partner. It also does not provide any training to the other partner in the event something happens to the “financial” partner. For us (as I assume it is for most couples), investing is going to be a life-time pursuit. Having one of us take on all the responsibility and make all of the decisions doesn’t make any more sense than one of us choosing the house we buy.

We came up with the following goals, realizing that this is the beginning of the learning process and that they might change as we progress.

Financial Goals

1. Maximize the profit potential of our portfolio while minimizing the risks of investing.
2. To have an investment strategy that we feel good about and are willing to follow consistently (without too much second-guessing).
3. To create an income stream that we can manage with minimal (but regular) attention.
4. To create wealth to invest in passive income streams which provide steady income.
5. To establish a book-keeping system that will track the success rate of different strategies.

We determined that we were moderate in our risk tolerance, with the goal that we will use options to reduce the risk to our portfolio, rather than just using options to maximize potential gain. The lesson asked us to develop a “Trading Mission Statement”, which was a very good idea. Julie is reading a book called “The Family Manager Takes Charge”, by Kathy Peel, which discusses writing a mission statement for your family. Kind of a bizarre concept, but really very practical if you think about it. It goes back to the old adage that if you fail to plan, you plan to fail. You don’t know if you are reaching your goals if you never figure out what your goals were in the first place. We came up with the following:

Trading Mission Statement

• To follow several investment strategies, each designed to grow a defined portion of our accounts with varying degrees of risk and required involvement. Our goal is to grow our net worth by an amount greater than the market average (with an average of 20%) while taking on less risk with a reasonable amount of time spent.
• Options – To establish an options trading account with the goal of doubling it in one year’s time. We are only willing to put 50% of our options account at risk at any one time. At the end of 18 months we would decide if and how to incorporate options into our other investment strategies.

Julie and I disagreed about what percentage to shoot for. I would be content to beat the market averages by an amount which makes it worth the amount of time and risk that we are investing. That allows for being happy with a flat return in a year that the market as a whole went down. Julie wants to aim for an average of 20%, which would certainly satisfy me when compared to the long term market average of about 10%.

We then came up with a list of trading dos and don’ts. Again, I’m sure that our list will change over time, but this is our list based on what we have learned form being in the market for the last twenty years.

Dos and Don’ts of trading
Do:

• Keep it simple.
• Focus on the big picture.
• Keep to our trading strategy, even in the heat of the trade.
• Establish exit/target prices for each trade.
• Know and be able to articulate why we are in a trade and what would need to happen to stay in or get out.
• Trade companies that have strong enough fundamentals to provide support.

Don’t:

• Worry about controlled loses if we are confident that the decision making process was good.
• Trade against the trend.
• Be afraid to sit on the sidelines if we don’t feel like we have an edge.
• Let other activities take inappropriate priority over watching each trade.

And finally, we made an attempt to come up with a list of trade rules that all of our trades would have to meet.

Trading Rules
Does this trade:

• Have a firm loss limit.
• Have a measurable gain target that is at least three times the loss limit.
• Follow the trend of the market as a whole.
• Follow the trend of the market sector of the underlying security.
• Have a reasonable chance to reach our target price in a reasonable time frame.
• Involve a company that has fundamental strength.
• Have an available good entry point.

Tomorrow I’ll write about how our first mentoring call went.

Optionetics Mentoring Program

We have started a new chapter in our investing experience. We signed up for a mentoring program through Optionetics. We have decide to blog our experiences with options and with Optionetics so that others can benefit from our learning curve. We had considered working up some sort of affiliate program with Optionetics for this site, but after several unanswered phone calls and e-mails we realize that that isn't going to happen. The good side to that is that we can be brutally frank about our experience without worrying about the conflict of interest that would occur if we had the opportunity to make some money off of painting Optionetics in an overly positive light.

We were "invited" to join this mentoring program because we had bought another Optionetics program, Wealth Without Worry. That program, which cost about $195 plus $20 S&H, consisted of 2 DVDs and 4 workbooks. We were hoping that the expense would motivate us to take the course seriously. Unfortunately, it didn't. We never got comfortable with the program and never finished all of the lessons. So, based on our poor performance with that relatively inexpensive program, we committed to their $8000 mentoring program. The biggest sales points were the accountability (we meet by phone with our mentor once a week for an hour for 18 weeks) and what we hope will be a steeper learning curve since we will have someone looking over our shoulder every step along the way. We realize that the "magic of leveraging" that draws people into options is more likely to work against you than for you. We decided that understanding options was well worth the $8000 investment and that we probably weren't going to be able to do it on our own (through books and cheaper programs). So, at this point we are very optimistic about the whole concept.

Part of our commitment to the program is agreeing to spend at least 5 hours a week learning. We have decided that we would like investing to be a significant part of our income stream. To do that, we need to take this seriously and treat it like a business. We have scheduled a regular time in our day for study and trading and understand that there will be "business" expenses (in training and lost trades). We will continue to post as we work through the lesson plans and start trading. It will be a learning experience one way or another.

Optionetics Mentorship

We made a commitment to Optionetics' Mentorship program today. It is a substantial investment in time and money, but we hope it will pay off. We had purchased the training series Wealth Without Worry from Optionetics a while ago, but have had trouble working it into our trading strategy. It was a good introduction to options trading, but didn't help much with market evaluation. Options are effective at leveraging your investment so that you control a larger number of stock shares with a smaller amount of money. The potential gains are much larger, but the potential losses are also much higher. We were not confident in implementing a strategy that included options based on what we learned through the program. Supposedly, we are not alone. We were quoted by the Optionetics sales person the statistic that only one in ten traders that try options make money. A good sales pitch for the need for the more intensive mentoring program, but not a very good reflection on the other Optionetics programs, including seminars.

Worden Brothers - TC2007

We have subscribed to the Telechart products for several years. I was introduced to their software during a class I took on Technical Analysis. Technical Analysis is based on the belief that all of the information needed to assess a stock as an investment is figured into the price of the stock. By assessing the patterns of stock movement, you can assess the “market’s” opinion of the stock (investors' psychology). The theory is that what matters most in a stock investment is not what the company has done in the past, or even what the company will do in the future, but what the buyers and sellers of that stock think will happen to price. Technical analysis is based on indicators which suggest strategies of buying or selling a stock, generally relying on short term movements in price.
Personally, I think that it is a mistake to ignore the Fundamentals of a company when choosing an investment. When all is said and done, it is a companies fundamentals that keep income flowing and cause its price to go up. I have invested in some companies with stellar fundamentals, though, which have ended up being really poor investments. Like so many things, the truth is probably someplace between the two extremes in opinion. TC2007 allows me to search the market for stocks that meet my investment desires using both fundamental and technical analysis. It also lets me record my observations, plot my own indicators, and add lines and notes directly to the charts. There's a reason why it has been voted number one in its class by Stock and Commodities Magazine every year since 1993. I would find it worth the investment just for the daily notes and commentary by Don and Peter Worden. (You can try it for yourself risk free by clicking the link below).