top of page

Step 3 B- Reverse Average Out Options Adjustment Strategies

Welcome to yet another article regarding the options trading strategy. We are going to learn about the second option adjustment strategy which is more powerful, more refined and I have done a lot of study on that and that strategy is called reverse average out. So why it is called reverse average out and how it is more effective than I am going to tell you and at the last, I am going to show you some ways to improve even that refined strategy to make it more successful. So, let's understand the reverse average out option adjustments.

We are going to learn you can say a reverse way of doing average out and it is called reverse average out and then we will learn why the reverse average out makes more sense and require less margin or capital and it is successful most of the time as compared to the normal average.

We are going to discuss the same thing first. What is the logic about it? What are the situations and I will tell you some with one example of how it is going to work? So, logic is very similar to the earlier one. Only the logic here that we are only going to average out in the falling market, not in the rising market that I told you in the previous article also in my secret sauce. If the simple average out plus secret sauce you mix it somewhat it becomes a reverse out. But here as the name suggests, we only average out when the market reverses.

So, the name is very simple and also logic is very simple. When the market is going to reverse then only, we are going to average out. If the market will not reverse, we will not do the average out. We will bear the losses, will close the position in whatever loss we have already defined right. So, that's simple logic. So, what basically we are waiting for? We are waiting for the market should confirm that it is reversing and it's coming down right. If the market will not reverse, I will not exist in the position. Why we have to do because see if I am going to adjust the average out, I need more money, I need more margin, and suppose the market keeps going in one direction then I will incur more losses. So, when I am going to do an adjustment, the only market is going to reverse.

For example, let’s say nifty is at 13000 approximately. So, suppose I sold one lot of a call at 13000 for example and it went all the way to 13500. Now, I will not do anything but when from 13500, it will come to 13400, and like that I will keep adding but what will happen if, after thirteen thousand four hundred, it will go again back to thirteen thousand five hundred, I will not do anything. I will be sitting with two lots. So, my strategy is very simple. When the market is going to reverse the 100 points then only, I’m going to adjust according to my capital.

So, if my capital is less, I may adjust when the market will come back by 200. If the market will not come by 200 points, I will bear losses on one lot so that way my losses will be limited and my adjustment will only work out when I have sure confirmation that the market is reversing and then I will take benefit of that reversal. So that's the basic logic. The second thing is the situation.

As I told you that situation should be a reversal. There should be a confirmed reversal. So, the market should go up in case of a call. In case if we sell the call, the market should go up and reverse, we have sold out, the market should go down and recover. So, in both the condition, it should reverse from the trend.

The third important point in time and what secret sauce you can do with this? So, let me tell you first by example and then I will share with you the secret sauce. I have one excel sheet on reverse average out where I have put already my formulas in all for the reverse average out. So, if I have to do reverse average out, I already decide or pre-decide what is the point when I’m going to add and I put a GTT or you can say order there is a function in Zerodha.

If you go, there is something called GTT order. So, if you put there that at this price, I want to buy out then as the option price will go to that price, it will already automatically execute. So, it becomes automatic. Now, why I am explaining all these to you. I am explaining from the point of a normal investor who wants to get an extra two-three percent per month but he doesn't want to sit in the front of pc or front of his trading terminal holding.

So, in conclusion, I would like to tell you that Successful options trading is not about being right most of the time, but about being a good repair mechanic. When things do not in your way, as they often do, you need the proper tools and techniques to get your ideas back on the profit track. We told some basic repair strategies focused on increasing profit potential on a long call position that has experienced a quick unrealized loss. I hope you enjoyed the article.

Recent Posts

See All
Post: Blog2_Post
bottom of page