Scale-down buying and scale-up selling
by Jerry Kopf
Professional traders, like the average retail speculator, are often right and often early. Good option
traders promptly jump on a developing trend. But the cost of buying a wasting asset too early saddles the
buyer with a temporary loss. Later, when the forecast proves correct and the calls climb sharply, the
benefit of scaling down becomes evident.
Of course, many traders will abide by the maxim: Never average a loss. For market makers, that may be a
good rule. In a bind they can hedge calls or puts with other options. The average retail customers, though,
are market timers. Their initial buy price depends on what point in the intraday trading range they got
filled. Most often, they have paid more than necessary and chased the price of a call or put. For these
customers, averaging down, just once — with a stop below — has some real tactical benefits.