Dykstra: Digging Into Readers' Questions

When we are experiencing this kind of drastic volatility, you must be prepared to buy or sell accordingly. In order to execute a trade properly, you must understand why I set certain buy and sell levels.

Technically, when I buy the same position at a lower cost, we call this "averaging down." This happens when the stocks hit our buy and sell levels.

Take the Altria(MO Quote) June $75 deep-in-the-money calls as an example. I have already booked a $2,000 profit with this particular pick. The deep-in-the-money calls I traded were the June $75 (MOFO). I bought our first 10 calls on Feb. 23, for $10.50.

After the stock moved against me, it hit my second buy level, $9.20, which I suggested on Feb. 28. So, for $19,700, we were in control of 2,000 shares of Altria common stock, totaling about $170,000 worth of stock. So we had an average price of $9.85 for 20 calls. Sticking with our game plan, we put a GTC sell order in one point higher than our average cost, at $10.85. That order was filled at $10.85, giving us a $2,000 profit in less than two weeks.

So to answer your question about whether I'm setting a stop-loss level, the answer is "yes and no." Because I am buying a deep-in-the-money call and setting a strike date four to six months out, if I stay disciplined, my record shows that I can win.

Thank you very much for your interest.

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