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Hi Stig:
Thanks for pointing this out, especially to me.
I don't want to mislead the group.
In fact, when I mentioned averaging down when trading options, I usually
mentioned (though sometimes I might forget) these points:
1. Averaging down is NOT good in a BEAR market, whether it's for stocks or
calls.
2. Playing options is very risky. You can LOSE EVERYTHING.
3. You need to buy calls with securities that are FUNDAMENTALLY sound.
4. Your first entry, hopefully, is based on some reasonable technical
analysis.
5. You don't put all your eggs in one basket. That is to say, as I
mentioned last night,
if you have $100,000 to trade 10 (or whatever number of) stocks/calls, you
should
divide your $100,000 by that number, AND NO MORE, for each stock/calls
intended.
6. You don't average down every $ 1/2 (or whatever minimum amount) stock
price drop. The price
drop has to be reasonably large before you average down again. A very
rough rule-of-thumb may be 5-10% for very high-priced stocks, or 25-35%
for the actual
first purchase price of the call.
7. You limit your TOTAL number of buys (including the initial one) to no
more than, say 5.
After that, if (a) you have used up the allotted amount (see #5), or (b)
if you have
reached the maximum number of buys, you take no more action. You just sit
and wait, for
either the stock to: (i) go down further - in which case you may lose
everything; (ii)
stay around the same price level as your last purchase, and you still lose
some; (iii)
to go up somewhat - at which point if you don't feel comfortable, you can
always get out
kind of break-even; (iv) go way high - at which point you may do the
reverse of
averaging down buy, that is, you sell some at a higher price, some more at
yet a higher
price, and so on and so forth; (v) go extremely high - and if you're like
me - a very
greedy person, you may bet your luck on either (1) the stock will go way
higher for a
much longer period of time and then get out with 10 or 20 times the
profit; or (2)
unluckily, as it happens to me many times, only to see the profit
evaporate and the
call dwindle to zero.
8. There's always an element of luck. Perhaps I've been lucky the past 6+
years...
There may be some points I have missed, but that's essentially it. For
those who have read my posts in omega, CL, and RT lists, hopefully you'll
agree that I do not consciously try to mislead people and paint a rosy path
--- leading to hell eventually.
But if it seems that my messages are misleading, please forgive me.
Regards,
Wong
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At 09:13 PM 01/20/2000 +0100, Stig O wrote:
>>The other thing is averaging down. Some can make it work, but to me it's a
>>BAD idea!
>
>That's exactly my point Phil.
>We are living in an era of "dipbuyers" and people don't think stocks can
go down for a long period in time and cetainly not in price.
>If you know what you are doing it may work, but for peole with small
accounts and on margin, this tactic can become a nightmare and the road to
disaster.
>I get nervous when I see Wong's post without warning sign.
>We have many new people on the list.
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