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Join Kirk Du Plessis on The "Daily Call", created and dedicated to you, the options trader, stock market investors or trading wannabe. This is your daily dose of actionable advice, tips, and strategies to help you learn how to generate and earn income investing with options. Inside we'll cover options strategies, option pricing, trading psychology, technical analysis, the stock market, day trading, investing basics, bitcoin, investing in ETFs, dividend investing, automated trading, index investing, and everything that works (and doesn't work) to help you make SMARTER trades.
Most Recent Episode
#214 - Should You Dollar Cost Average When Trading Options?
< 1 day ago
Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. Today, we are going to answer another member question which is, “Should you dollar cost average when trading options?” I think there's two key concepts that we have to describe, first of all. One is this concept of dollar cost averaging which is the idea that when you buy stock and if the stock goes down and you like the investment or presumably, you think there's value in the investment that you continue to buy in small increments all the way down. If a stock is trading at $100, you buy say 10 shares. Now, the stock is trading at $98, you buy another 10 shares. Your average blended investment is now $99 per share. You’re averaging down as the stock continues to move lower. Now, the concept is not easily applied in its I guess, regular form to options trading. This would assume that if we wanted to dollar cost average in options trading that if a particular strategy that we’re trading goes down in value that we would then trade more of that strategy or add more of that strategy. Now, I'm not a fan of just generally doing this. I don't think that that's the right way to look at it. The other way that we can look at dollar cost averaging is actually just spreading your trade entry out over time and averaging strike prices. This is a way I really consider this concept being applied to options trading, is with this laddering technique that we talk about where if a stock is trading and we have a strangle at the 15 Delta, let's say instead of doing 10 contracts at one time, we want to do just maybe two or three contracts. Then if the stock moves, we move our entire next entry of a strangle, the next say three or two contracts, we move that maybe a couple of strikes higher or a couple of strikes lower wherever the stock ends up going. Now, this is different than dollar cost averaging because when you dollar cost average, you’re moving down always with the stock or moving up always with the stock if you're shorting the stock. In the case of options trading, we’re just maintaining the same range or the same perimeter around the stock as it moves. If the stock continues to move higher, each additional laddered or sequential trade that we make in that particular stock or ETF is at higher and higher strike prices. Say we’re targeting the 15 Delta on either side. We’ll continue trading the 15 Delta on either side even if the stock makes a $5 move. We’ll just stair-step and ladder our trade up or ladder our trade down. That's why we call it laddering because on the pricing table, it looks like all of our positions are spread out in an equal distance or generally equal distance as the stock continues to move. Now, I think this concept really works well with options trading to ladder trades because we basically move with the market. Whenever the stock moves higher, our new positions are now centered a little bit higher. If the stock moves lower, our new positions are now centered a little bit lower. In fact, just this past month in April, we had an EWY position that we had entered three laddered iron butterflies into and we got out of all three of those with profits at different times. They weren’t all exited at the same time. We just were very opportunistic about taking profits whenever the stock came into the range of those particular strikes. I do agree conceptually with the idea of dollar cost averaging, but I think we just have to apply it a little bit different to options trading. As always, hopefully this helps out. If you guys enjoy these, let us know or shoot me a message over on optionalpha.com/ask and leave me a voicemail with your guys’ questions for upcoming episodes. Until next time, happy trading!