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.