Tuesday, March 27, 2012

is averaging an option good or bad?

in my opinion, averaging the option is neither good nor bad.

lets assume you buy xx00 call.
it drops from 40 to 10.
you were either wrong in judging the situation or unexpected unforeseen was forced by operators.

you study the situation again
and now find that it is much better time to buy again.

should you buy xx00 call now? again?

well, yes - if you know what went wrong in first trade.
no-if you don't know what's happening.

the first trade might just be a case of right judgement of a move but wrong timing.

i have seen that non-trending markets turn often and decent.

have seen options drop from 100 to 50 and again go up to 225 (example).

if one doesn't know what's hapening, what happened, averaging is bad.
if one knows what happened, averaging is good.

ofcourse, need for averaging shouldn't have occured in first place. correct averaging helps in recovering a loss with lesser difficulty. also, risk of averaging at low price is low.

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