Options Guide

Dykstra: Averaging Down Is Key

Stock quotes in this article: CSCO , GLW , NOK , HPQ , CAM , ADM , HAL  

My deep-in-the-money options trading system had a good start to the week with two wins on Monday, bringing my record to 98-1. For the picks, I do the legwork so that you don't have to. However, investing is serious business, and my system has guidelines you should follow if you want to ring the register with me.

Today, I will explain the concept of averaging down on a position and why it's crucial to my strategy.

I pick good companies whose stock prices are beaten down more than they deserve. Because these are solid companies that have fallen victim to broader market forces, they stand to recapture some ground as markets start to recover.

They don't need to come all the way back to their one-year highs for us to win. We just expect them to move up enough to give us a $1 boost to the price we paid on the option, so we can add $1,000 to my scorecard -- or $1 a share on 10 contracts of 100 shares each.

I don't advocate a long-term, buy-and-hold strategy, but I do give my picks plenty of time to meet my goal. I pick these companies because they fit my strategy and put us in position to make money when they bounce. We are waiting for them to bottom. That doesn't always happen. We can't foretell the future or anticipate unexpected bad news from a company.

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