Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer another question from the Facebook community that we got recently which is – “When should you not add more laddered trades?” Again, the question that somebody asked was the following and they said, “How do you decide if you should add more trades to the same underlying (basically ladder into more positions) if the first trades have already started to get challenged?” This is a really good question and it's something that comes up again and again. It’s this concept of laddering which most people understand, but really quickly, it’s just the idea that we’re going to spread our trades out over time. Like rungs of a ladder, you don't jump from the bottom of a ladder to the top. You have rungs that you kind of slowly creep up or creep down to get up and down the ladder. Very much like that for trading, we’re going to ladder into positions by entering a small batch of trades in a ticker, then if the stock moves or when the stock moves, we’ll enter another small batch, say a set of two contracts, followed by another set of two contracts, followed by another set of two contracts.
The question is – “When do you stop laddering?” Well, the first answer to this is you would stop laddering when your position size is full. Once you have reached your targeted position size, whether it took two entries or three entries or five entries, you should stop laddering. That should be self-explanatory, but in case it's not, that's the first one. The second reason you would stop laddering is if the stock starts to move sideways. Now, this sometimes is going to happen potentially early in the expiration cycle and you might have planned to get into say three or four laddered positions in a security, but the stock is not moving. It’s just trading dead sideways from your original entry. In this case, I choose to often not ladder into more positions or what I refer to as hamburgering which is not a technical term by any stretch, but I just made it up – is hamburgering your positions one on top of another, like I will not throw another hamburger or another position on top of an existing one. If the first position is working out and we wanted the stock to move sideways, it’s moving sideways, why mess with it, why touch it, okay? That's the second way or reason that you would not ladder into more trades.
The third way or reason you would not ladder into more trades is if one of your long strikes when you're doing a risk defined strategy gets breached because when your long strike gets breached, if you are in a position where you're doing say an iron butterfly, an iron condor or a credit spread, you don't want to add those beyond a long strike. That creates a void or a gap in the payoff diagram which actually in many cases, could lead you to take in on more risk than you initially thought you might be taking for the position. We often use those long strikes as basically like the fail stop for laddering into contracts. If the stock has moved so far and so quickly that it has basically breached the long strike on either side, then we would stop all laddering procedures and start actually making adjustments to positions. Otherwise, I think laddering is pretty easy conceptually. You want the stock to move, you know the stock is going to eventually move, so why pick the direction? Start with an initial position where the stock is now and then as the stock continues to move, a couple of days later, add another position, a couple of days later, add another position, etcetera, etcetera. Hopefully this helps out. If you have any questions, let me know and until next time, happy trading.
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