Of course... Adding to a losing position linearly in even increments you are drawn down 50% from your initial entry X number of contracts. If your sitting 8 the markets had moved 40 points against you without retracing 50% + 5 points allowing you an exit. There is no magic to this algo. Any time you add to a losing position the market has to check up for you to have a profitable exit. 10 strikes linearly provides sufficient range where a relatively small options position can cover and nearly make you whole. Once you've started compounding contracts (doubling up etc.) all bets are off. When you run your simulation: Try synchronously trading both sides of the market in separate sub accounts. One Long, One Short both hedged. Once one of the sides is drawn down reaching 4 contracts, let the other side stack up contracts until the drawn down side stops out at 10 contracts or the pyramiding profits dwindle to the 5 point minimum profit level. The Algo should now scalp virtually every 5 point swing inside of +/- 25 points and generate profits when either side breaches its trading range. Between 25 and 50 points the drawn down side is time locked but the counter is pyramiding trades. There is a lot more to this... over night rules, liquidity issues. safety stops, expiration / rolling contracs, assignments etc. but enough to start... Basically all of the nasty things we are taught not to do wrapped into one trading algo.
I buy after stocks get lower, and I profited in the long run. (I am one of the very few profitable traders, I am a long term trader). Sometimes I average down with leveraged ETFs, as to add leverage without risking margin calls. Of course you must be able to wait for years (although meanwhile you receive dividends, which you can spend right away). And you must be able to watch your position going (temporarily) down 50%.
Averaging down is so exciting!!!! lol <object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/os9Sa2oxmNk&hl=en_US&fs=1&rel=0&color1=0x2b405b&color2=0x6b8ab6"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/os9Sa2oxmNk&hl=en_US&fs=1&rel=0&color1=0x2b405b&color2=0x6b8ab6" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>
Funny... I simply suggested a trading algo to run as a simulation exercise in the context of this thread: My point is if you carefully manage your money and positions you can add incrementally to losing positions inside a covered trading range and make profits while mitigating a substantial portion of the runaway, blow out your account, trading risks typically associated with averaging down. Roll up your sleeves, open excel and build a few models working through the different scenarios. The key is to cover a large enough range where cheap OTM options can cover your potential losses without sucking out all of your profits. Another suggestion for ES traders is to use SPY options for hedging because they have better liquidity, tighter strikes and spreads... Down side is it complicates your taxes...
Sure you can add gamma scalping to the options play... It gets interesting and a little more complex when you overlay the futures scalping while synchronously trading both sides of the market. Off the top of my head, you'd have to figure out how to unwind and how to calculate your safe trading range... but the concept of having a "prepaid" hedge in place to cover overnights when options are not liquid is especially appealing. When you take a step back... all we really want is to establish a range where we can systematically execute sequences of trades in either direction and cover our drawn down losses on the edges.