Dykstra: How I Pick Stocks

However, this can be good news for us but requires you to pay close attention and follow the rules.

Now, onto averaging down. Essentially, when the price of an option goes south, it may be necessary to buy more contracts. I do this in order to lower my average entry price.

Here's an example. In April, one of the companies I picked was Frontier Oil(FTO Quote - Cramer on FTO - Stock Picks). At the time, the stock was trading around $27 a share. We bought the call option at an average price of $8 -- that was our entry price. I always recommend placing a good-till-canceled (GTC) order $1 above our entry price, so the GTC sell order in this instance was $9.

However, the stock went down, not up. No need to panic though, I expect this to happen at times and am prepared. Through the system I developed, I know that if the stock fell to a certain level, I would need to add to my position to put myself in a better position to grab a win.

In this case, I noted that if the stock price fell to $25, it would be necessary to buy more options at a lower price than we initially paid. When the stock hit $25, I bought 10 more contracts at an average option price of $6.50.

Now, instead of my average entry price being $8, my new average entry price became $7.25 (which is the average of $8 and $6.50). Because the new average entry price is lower, the new GTC order also declines. In theory, instead of the GTC price being $9, it would now be $8.25. However, because the options we deal with generally trade in 10-cent increments, it is necessary to do some rounding. In this case, we rounded our GTC price to $8.30.

« Previous Page

1 2 3

Next Page »