Alternatives to averaging down for smaller portfolios?

Community AMA
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[Mildly paraphrasing a question I asked in TF for more detailed answers]

I feel like averaging down as a parachute to escape poor timings by lowering your cost basis and cutting at the first pop, is a tool that only becomes available once you’ve got a decently large account. So until then, you’re just left to cut positions for a loss instead of averaging down. Not a bad deal compared to averaging down and making your position large and not seeing a pop imo. That said, is there some other strategy one can use as an alternative to averaging down when one has a small account and one doesn’t want to risk having inadvertently large positions by averaging down?

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Larger ports will be able to average down on more things and more often, but the strategy is if you have a small port - you should be playing things your port can afford to buy and average down on. Never use all your buying power.

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I agree with this, but I’m talking about scenarios where you enter a play with a small position of a reasonable size for your portfolio, but averaging it down any more than 1-2 contracts will make it an untenable position. Are you suggesting that you should account for the possibility of averaging down as a part of the “potential position size” before even entering into one contract? That’s interesting, and I haven’t thought about it like that, but I like that idea. The only downside being that I feel like that may make you sit out of plays that you can afford to play.

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Assuming it is all options, I think a tight SL might be the most beneficial. It should be mentioned that buying down is not always an effective means of escaping a bad play, things can and will go wrong.

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You can aggresively cut your losses to preserve your capital and try to get a better entry

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I’m good with tight stop losses when scalping shares bc a number like 3-5% loss is big enough for shares that if it drops below that it’s not worth it anymore and I’d rather get out and look for a re-entry. But for options I haven’t been able to figure out what good stop losses are because many plays frequently go down like 5-10 or heck even 15-20% before ending up green because those large swings are normal for leveraged instruments. So I really don’t know how to play stop losses on options.

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Create a “cheap options” list to start off with (like Ford) and this will help solve the problem.

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Hmm I see. So, just to confirm whether I’ve understood this right: you’re saying that instead of buying more contracts when stuff drops, you sell your lossy contracts and only buy the dip when there’s a good re-entry (like a strong support for example) so that way you limit the losses of what’s already in the red and may see greens in your re-entry as opposed to trying only break even with your lowered cost basis? Out of curiosity, wouldn’t this be a good strategy regardless of portfolio size?

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That really comes down to your risk tolerance - I like to base mine by time to exp. The shorter the exp the tighter I would make it. You might lose out on some but if the goal is risk management it has to be accepted ahead of time.

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Yes.

It would be a good strategy across the board, but the trade off is that averaging down is easier to execute than buying at the actual dip.

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i don’t think anyone is going to get perfect entries, even Conq takes starter positions. you don’t need a big account to average down depending on what type of options you are trading.

this isn’t a perfect trade by any means but averaging down here let me come out very green rather than just green. RKT looked decent yesterday at first but then it started to track SPY on the way up till close. other than that, the thesis that the real estate and mortgage market is weak right now in the face of a hawkish Fed still stands.

i bought my first 2 calls at a cost basis of .33 but with the upward SPY movement and my catalyst a few days away, i bought 2 more .23 to bring my cost basis down to .28. total cost $112. at one point, these were trading as low as 0.19 so i was already down more than 25%. i could have bought in for more but felt at that point it would be over-leveraging my portfolio and i wanted to give the thesis time to play out.

this morning, hawkish comments came out a bit early and finally saw the SPY clawback that a lot of people were expecting. i sold all of these positions for more than my original cost basis of .33. i think you should think of averaging down, affordably and within risk size, as maneuverability. give time for your thesis to play itself out because you can’t account for all the factors that can make your trade go sideways - albeit temporarily

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