I figured since I’ve seen a lot of comments on this topic, I ought to chime in on a few thoughts as to why this is a tough strategy to pull off.
It’s difficult to throw good money after bad. I’ve studied a few Market Wizards of old, and never came across a great trader who let a loss run, only to keep throwing more money at a runaway loss.
If you get into the trade initially with smaller size, with the intent on adding, that’s fine. However, if you are fully sized and wanting to throw more money at a bad trade, over time this is a way to yield bigger portfolio losses.
For those of you averaging down options, let alone weekly options, remember that you are throwing good money at a bad instrument. Options decay. The cheaper a position has gotten, the faster the premium will evaporate.
I don’t have many issues with averaging down a stock position. I do this often, but I rarely average down an option trade. The reason why is that my stock has very little chance of going to zero. My option is guaranteed to go to zero unless I am right about price.
Think that over before you go overboard on averaging down an option trade.
OA
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How long will you give a short-dated trade (AAPL) like this if its not working out? (obviously, working out is all relative to time) …mainly, do you ever sell, recover some premium and just move on?
I have a price that serves as a line in the sand.
Since I have a weekly, I have predetermined the time I need.
thanks!
Ruh Roh, LNKD is done.
Timely post as I find myself wanting to average down on the AAPL weekly trade.
I do too. I am thinking about a regular Oct expiry, then just managing the loss on the weekly. Treat it like two different trades.
If AAPL holds 85, I think I might do this.
Sage advice. I have done the average down in options before with miserable results. “Cost of tuition.”
OA, I believe you said yesterday $485 to be the level in which the AAPL trade would be broken.
Sold my YELP 70 puts yesterday for 2.50 because YELP continued to defy gravity despite being a worthless site that is worth 4.5 billion dollars. Today somebody relaized 4.5 billion for a company that never has made a cent, was a bit ridiculous – now the options are over 6.00 – perfect timing again !
Dow down 40, social media and china internet getting dismantled.
Watch your solar. They are going after the relative strength stocks today.
NASDAQ getting crushed here
Massive selloff in the solar space in the last 30min. OA are you trimming some gains in the space
Yup – sometimes I need to burn myself to remember fire’s hot.
Hey Cheese,
Saw you’re doubling down on your 53’s. I’ve traded FB five times, 3 profitable, 2 not.
FB – IPO shares (yes it took over a year to go green, but I still have ’em)
FB – L O N G call (like a September 40 bought back in July when the stock was low to mid 30’s.
FB – ATM or slightly OTM spread (I wanna say it was a 50/48 spread when the stock was nudging 51
Losses:
A 52/50 spread that needed another week that I didn’t give it
Weekly 51’s (which I told you about yesterday) for last Friday.
My experience is the stock moves syrupy slow and dances to the beat of its own.
Have you considered “repairing” your trade ? I’m guesing you’re in the original 53’s for .75-.90 ?
You could do this weeks 49.50/47.50 spread (if you’re betting double to 53, betting to 49 isn’t a reach). Or even monthly 49/47 spread.
Not trying to be a butt-insky, but I figure we’re all in here to benefit from each others experience and the spreads make a nice hedge against your longs, without sucking any cash.
Just a thought.
@Ian – excellent thoughts too. In the weekly 53s for an average of $.30 – at this point, I think I’ll just let go and start fresh. I like your idea – and am filing away for when I do my week end recap of “what can I do better”? Many thanks
I have booked DANG, FSLR and cut SODA. Also stopped on DATE
just your options, or the stock also?
Thanks for your advice yesterday on SFLY and SODA – those have been bannered on my “want” list for a week. I agree with yesterdays sentiment that this is a time to consolidate, where it makes sense.
I’m also guessing you just fell through your floor on AAPL ?
FSLR stock?
Nope, calls
Very interesting to see the Dow/SPX hold up while they dismantle the RUT/NASDAQ.
That much closer to the bottom.
ARGHHHHHH, sold FSLR stock. I cant believe this. Shoot me in the face.
That was a pretty big swing in solars. What kind is it – a “triggering the stops to get shares” kind of swing or stocks “getting tired” kind of swing.
OA, definitely agree with your comments in regards to averaging down. Do you have an opinion on averaging down on LEAPS or options that do not expire for 4 to 6 months? I am talking in the money or not too far outside. I have been playing with this strategy for a bit and have had a lot of success. Then again, the market has cooperated where a strategy like that would work. Any thoughts on it? Thanks.
Great question. Start scaling into the position. I always do this with long term ideas. Never take the full position all at once.\
Yep, have been doing that lately and love it. If I am going to put on 100 contracts I usually put 25 on and then buy in increments of 25 (sometimes 10 in a fast market) and average down. Only if I have 6+ months though and I am in or near the money.
oh well, can’t complain, have netted 13% on a full position in FSLR …will be buying back though.
YGE was not happy to see me today, so I kicked it out the door for a while until it gets over itself. Come back when u feeling happy.
Call me crazy but I’ve decided to book all gains in YGE. I was holding stock and calls.
I am calling you crazy and doubt this trade is consistent with your original trade plan.
$HAS
LMAO…I call it being nimble. To much uncertainty at this point and one can never go wrong taking a profit;-)
OA, when would you say we are entering oversold territory?
Now according to my standards, no. We are close though. A trend day down today, and a gap down tomorrow ought to do it.
Hi, OA. Thanks for your comments.
If there is a dip in option price shortly after buying, how can one know to hold patiently? Should there be a mental “hands off” period before placing a mental stop or exit price particularly on short fused options?
Thanks,
Out
Heat is part of trading leveraged instruments. You just have to draw the line somewhere.
Yge is scaring
YGE still hasn’t taken out yesterdays low…Hang on little buddy!
This is my thinking too. Holding.
Well poo
Time to leave the screens I guess..
look at our little boy CRUS holding up nicely… think he might rip when the market tides turn.
In this market, the most profitable thing you can do is $HAS (Have a Sandwich), or $GLF (Golf). Those who are trash talking YGE today will be sorry in a week.
@Ian – it’s a picture perfect early Fall day here in the Midwest – crisp, clear, bright blue skies, leaves are turning.
Life is good.
That’s the spirit !
I went to school in the midwest (I’m CA born and bred) and nothing here can rival those glorious fall days !
But we here on the left coast DO have our seasons as well, namely:
FIRE
FLOOD
BROWNOUT
EARTHQUAKE
@Ian – Here we just have winter and road construction. What part of Cali? NorCal native myself – came out here for college and stayed – somehow 25 years have just gone by…
I live in SoCal (just a little bit north of where I-10 ends at the ocean 🙂 ), but spent about 5 years in the Bay Area (Monterey, Carmel). My Dad had a house on the 18th @ Pebble Beach, so that’s where I played my first 18 hole round.
It did hit 8.77…it may very well run to 10. My target was always 9 since I have trouble watching all this minute by minute. It was close enough. Seems to be flushing at this point.
Increased my cash position substantially and ready to buy the blood.
The foolproof trade is to buy vxx puts whenever the vix spikes. give yourself enough time and they will always go down as the volatility etfs are all designed to go to 0
I may try that as a YOLO trade.
that vxx put trade was decent i guess
my spy 168 put hedge is now a double. it’s like the pain killer my portfolio swallowed before geting colonoscopy’d today.
Me too. Had been adding SPY puts since Friday through yesterday. They are now the largest part of my portfolio. Also sold FSLR and half of YGE yesterday for respectable gain. I cannot brag about the rest of the portfolio. Rest of the positions look like they were stripped naked, taken out in the open, spit at and then shot through their heads.
LMAO!!!!
YGE has pinned below yesterday’s low.
LITB crushed.
Wow, the selling is relentless. YGE under the low.
Seems as if the sellers can see my longs and are attacking in force. Red as far as the eye can see. Can’t wait for that gap down tomorrow…
Oh to be a Fly on the wall
we still in LITB, OA?
Also, seems like the rubber band is getting superrrrr stretched to the downside. Could be violent when we (if) head higher
The casino took back all my AHWOA winnings. Oh well – let’s start over…
Really? You lost it all?
Wow
Took me a while to start trading options, worked up slowly. Today the major contracts got bloody (along with some solar stocks…)
lesson learned.. sure to have a hedge even a small one
Me too….
One important rule to follow, when the market is in a state like this, reduce risk. There is stuff out there you can’t always control.
Im almost there.. you not alone !
Just spitballing here. You know what would be the path of max pain? Market goes up into the close. Then gaps down tomorrow morning, traps lot of traders, touches VIX over 21.5 for a final flush out before marching higher in couple of days. In other words, anything I buy today is going to be longer dated and keep scaling in gradually.
Lots of my trading stocks bouncing off ( marginally) or holding 20 and 50 day ma’s ONVO, UNXL, WLT, AAPL.Going to be interesting to see the close.
Should I be worried that my alert/alarm mailbox on E-Trade is now full ?
On a brighter note, YGE and CRUS standing up bravely to the onslaught. I’m also reminded of last Thursday which was bloody and we had a nice couple of trading days the following week.