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1989issue C091-3

One add option sizing with a scale-out and a trail

A decaying option can show a temporary loss even when the later direction is correct. The archive procedure ring-fences a dedicated-risk-stake, limits each idea with a dollars-per-trade-cap, adds once after a probe-fill, then uses a scale-out-position and a trailing-stop on the remainder.

  • Ring-fence option losses in a dedicated-risk-stake inside a larger account used as collateral, and stop option activity if that earmarked cash is lost.
  • Take a probe-fill first and place a mechanical-add immediately, with scale-in price and size fixed in advance so the second purchase is not re-decided.
  • Recut the stop after the scale-in-position so remaining risk stays inside the dollars-per-trade-cap. If that stop is hit, accept the capped cash loss rather than hold a decaying contract into expiration.
  • After a favorable move, a scale-out-position plus a trailing-stop banks some gain and keeps the remainder from reversing into a loss.
Entries in this reading3 entries
Current trackScale-out position reduction22 readingsScale-in position adding34 readingsTrailing stop122 readings

A decaying option can lose money first

Buying a decaying call or put before a trend is fully underway can produce a temporary loss even when the later direction is correct.

Keep option losses inside a dedicated stake

An option-risk stake can be ring-fenced inside a larger account used as collateral, with option activity intended to stop if that earmarked cash is lost.

A predetermined dollars-per-trade-cap is used so one position cannot consume a large fraction of the dedicated-risk-stake. The illustration uses 1500 at risk per idea against a 15000 option-risk budget.

Start with a probe-fill and one mechanical-add

Scale-in price and size are fixed in advance and the add order is placed immediately after the first fill so the second purchase is not re-decided. The probe-fill is the first, partial entry, and its purpose is to leave cash available for that one later add.

In the worked add, a six-contract long at 5 becomes twelve contracts at an average of 4.5 after a scale-in-position at 4, and a stop at 3.25 is set so remaining risk stays 1500.

Buying the full intended size at the first price can leave no cash reserve for a later add and, with a two-point stop on twelve contracts from 5, produces a 2400 cash loss, above the 1500 dollars-per-trade-cap.

Accept the cap if the recut stop is hit

If the post-add stop is triggered, the procedure accepts the capped cash loss rather than holding a decaying contract in hope of recovery into expiration.

Cash results of one add and a recut stop versus buying the full size

Kopf’s worked October 250-call example puts four cash results on one scale. After the add at $4, the recut stop at 3-1/4 keeps the loss at the $1,500 dollars-per-trade cap; buying the whole 12-lot at $5 with a two-point stop loses $2,400; a six-lot that never adds and goes to 10 makes $3,000; the same rally after one scale-down makes $6,600. Figures are the article’s stated dollars before commissions.
Kopf’s worked October 250-call example puts four cash results on one scale. After the add at $4, the recut stop at 3-1/4 keeps the loss at the $1,500 dollars-per-trade cap; buying the whole 12-lot at $5 with a two-point stop loses $2,400; a six-lot that never adds and goes to 10 makes $3,000; the same rally after one scale-down makes $6,600. Figures are the article’s stated dollars before commissions.October 250 calls

The source states each result plus or minus commissions, which it does not quantify. Dollar amounts use the standard $100-per-point option multiplier implied by 1-1/4 points times 12 lots equaling $1,500.

Scale out of a gain and trail the rest

After a favorable move, a scale-out-position uses a limit sale of half the position plus a stop on the remainder to bank some gain and keep an open profit from reversing into a loss.

A trailing-stop on the remaining size is raised as the contract advances so a later reversal exits the position after an open profit has already been established.

Liquidating the entire position at the first modest advance is described as leaving no remaining size if a much larger later move develops, while small realized gains are said to be offset by losses.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
1 of 18 in the Scale-out position reduction track
19911-3 pp.Next on Scale-out position reductionPrecommit scale-outs and puts to replace impulseHope-mode delays a risk limit on a troubled position and is described as often producing a larger later loss.
All readings on this track · 18 readings
  1. 1989One add option sizing with a scale-out and a trail
  2. 1991Precommit scale-outs and puts to replace impulse
  3. 1991A written game plan for checklist, scale-out and staggered stops
  4. 2004Name the stop, require a 1:3 reward, then scale out half
  5. 2005Why pre-target scale-outs lower expected value
  6. 2008Preplanned butterfly exits with stops and scale-outs
  7. 2010Qualified trend, volume breaks, and a staged scale-out
  8. 2011Gated entry and scale-out after a climactic selloff
  9. 2011First-target review: scale out or flatten
  10. 2012Tiny scale-out as a systems decision test
  11. 2014Written size and exit scripts for scaling and risk
  12. 2017Constructing livable scale-out exit rules
  13. 2017Why the simpler looking system is harder to run
  14. 2018Prewritten scale-out and exponential moving-average exit procedure
  15. 2019A dual-career swing procedure that must output entry, scale-out, or abstention
  16. 2019A same-session opening-range breakout with a whole-number stop and scale-out
  17. 2019Grade the first seasonal long-put gain as a maintenance exam
  18. 2019Failed candlestick fades with breakout permission and scale-out
By fieldSizing and leverage109 readingsBy year1989126 readings
All 22 readings tagged Scale-out position reduction
Also on Scale-out position reduction5 readings
1989Shorter series need fewer recovery hits and raise scale-in cash1998Cash recovery grids for residual share construction2014Equal-dollar staging versus lump-sum and residual scaling2014Written size and exit scripts for scaling and risk2011First-target review: scale out or flatten