Averaging Down Rules

In their book Covered Calls and LEAPS, a Wealth Option, Hooper and Zalewski detail a number of defensive rules to manage a LEAPS position gone awry including how to average down a position.

The Averaging Down Rules

1. If the market price of a LEAPS drops significantly to a point where you are able to buy the same LEAPS contract you already own for 15% or less of the price you paid for it, then do so.
2. You should buy the number of contracts that brings your average cost to a price equal to two times the average down price.
3. The 5% return calculation for subsequent secondary call sales should be based on the original contract cost, not on the average cost of contracts. So, for a buyback on a secondary call sale on a $5.00 LEAPS, you should still attempt to realize a net return of $.25.
4. Sell the LEAPS at the new average cost plus 5%, not the original cost. So, for the preceding example, you should sell the LEAPS for $1.50 plus 5%.