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In order to be successful, you must first know the ground rules of the playing field you're on. With my deep-in-the-money (DITM) calls strategy, you must fully understand how to average down or to properly use the next buy levels.

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Many readers have written in asking me to explain this essential part of my strategy. Averaging down has helped me grab a number of gains and put other picks in better position to grab potential gains in the future. I have averaged down with

Morgan Stanley

(MS) - Get Morgan Stanley Report



(C) - Get Citigroup Inc. Report


United Health

(UNH) - Get UnitedHealth Group Incorporated Report



(BA) - Get Boeing Company Report


Texas Instruments

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TheStreet Recommends

(TXN) - Get Texas Instruments Incorporated Report



(CSCO) - Get Cisco Systems, Inc. Report


International Paper

(IP) - Get International Paper Company Report



(MMM) - Get 3M Company Report



(AIG) - Get American International Group, Inc. Report



(KO) - Get Coca-Cola Company Report





Parker Hannifin

(PH) - Get Parker-Hannifin Corporation Report



(GRMN) - Get Garmin Ltd. Report


Archer Daniels Midland

(ADM) - Get Archer-Daniels-Midland Company Report

, just to name a few.

Without averaging down, you will have a hard time achieving many of the gains that I am able to grab. So, listen up: Here are the basics.

I make DITM picks in my subscription newsletter, "Nails on the Numbers," three times a week (You can take a free trial to the newsletter by

clicking here

). In the columns, I let readers know what price they should pay for the options. I pick companies that are good and solid but are down on their luck, so to speak. They do not have accounting scandals, but instead are usually being beaten up by the Street because of a bad quarter or are being pulled down along with the rest of the market.

When I make my pick, I expect my order to get filled at that price. If it does, I anticipate that the price will go up $1.00 above my purchase price, and I will achieve a $1,000 gain. However, the reality is that not every pick goes straight up, and in order to stay ahead, you need to follow my strategy for averaging down.

With my newsletter, readers are given access to data on all my recent plays. I update my "Stat Book Scorecard" every single day. It's listed under the "recent plays" section of "Nails on the Numbers" ( In the next buy column of the scorecard, I list the price the stock must fall to before I automatically recommend purchasing 10 more contracts. So, when the


hits that level, you should buy 10 more



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I suggest that you do this with a market order, taking the options at the market price. However, you have to be smart and keep the goal of averaging down in mind. The point of averaging down is to put you in a better position than you were before in order to achieve a gain, not to beef up your position unnecessarily. There is no reason to add to a position if it doesn't improve your average price per contract.

If you buy more contracts, you have to make sure you buy the options at a lower price. For example, let's say my initial purchase price was $6. That means I would set my good-till-canceled sell order at $7. I am looking to lower both of those numbers with the next buy.

If the stock declines and hits my "next buy" level, I then want to place an order to buy 10 more contracts at a price lower than $6. Let's just say I place the order and buy more contracts at a price of $5 per option contract. My new average would be $5.50 (the average of $6 and $5 is $5.50) and I would reset my GTC sell order to $1 above my average. The new sell price would be $6.50. The goal has been achieved: I would have put myself in a better position to achieve a win.

If a pick continues to go down, I will ride it down to the bottom by continuing to average down, and then capture a win when it bounces a bit. Remember, it doesn't have to be a huge bounce because I continued to average down and lowered my average purchase price all along the way.

Now, you do need to pay attention when averaging down. You need to make sure that when you purchase more options, the new price you pay actually improves your position. If it does not, do not buy more. The recommendations in my scorecard are automatic recommendations, but it is up to you to pay attention and make sure your order achieves the goal of averaging down.

Always remember: Life is a journey, enjoy the ride!

Lenny Dykstra runs the newsletter service "Nails on the Numbers." Click here for a free trial. Mr. Dykstra, a former professional baseball player with the New York Mets and Philadelphia Phillies, writes regularly about options trading for


At the time of publication, Dykstra had no positions in stocks mentioned.

Nicknamed 'Nails' for his tough style of play, Lenny is a former Major League Baseball player for the 1986 World Champions, New York Mets and the 1993 National League Champions, Philadelphia Phillies. A three time All-Star as a ballplayer, Lenny now serves as president for several privately held businesses in Southern California. He is the founder of The Players Club; it has been his desire to give back to the sport that gave him early successes in life by teaching athletes how to invest and protect their incomes. He currently manages his own portfolio and writes an investment strategy column for, and is featured regularly on CNBC and other cable news shows. Lenny was selected as OverTime Magazine's 2006-2007 "Entrepreneur of the Year."