Position sizing re-visited yet once again

I know I keep coming back to this topic often and, although this is not a change since last time I mentioned it, it is worth observing.

I had raised my trade sizing up to an average of the entry prices and considered that every trade was going to be equal sized, and that looked like a decent plan. The trouble was that it out sized a few losers and under sized a few winners which will tend to skew the result to the negative... even though, historically speaking, it worked out very well. But "very well" isn't my thing.

I set up a spreadsheet to give me scale entries based on option prices based on 50 cent increments and it calculated the appropriate quantities for me. That was OK... but "OK" also isn't my thing. This method restricts me to increments that jump 4 and five contract increments in the lower range which left me guessing a bit when the price was between, say $2.00 and $.50, or even worse when it was between 50 cents and $1.00.

So rather than reducing the pricing I decided to let the trade size determine the entry price levels. So for every single contract increase in trade size the price self adjusts to my trade value based on cash and number of trades with a 20% cash holding buffer (basically I will only trade up to 80% of the account cash left and I figure that I will not actually get all trades filled anyway so it ends up being larger cash holding). This way the 50 cent trade sets the bar by using the trade value to produce the largest trade in the bunch, then it auto-increments down to 1. At certain points I have it set to decrement in 2's, 3's and 4's as the trade size gets larger to make the chart more manageable... but then again by that point I will probably be trading with IB and they have this as a setting to auto size the orders.

My point was that my average contract count per trade ends up being just OVER my estimated trade size if it were based on same sizing. Right now it is at 5.81 for June when I did 400 for the first week, 500 for the second week and now value sizing for the last two weeks.

The other thing that I just realized is that when averaging down on a trade after the price of the option has moved down against the entry price I can increase the contract count for the second entry which will serve two purposes.

1) it will average the price lower than an equal contract count second entry

2) which will allow a greater leverage of the entire position

A trade that I am in right now, for example:

FSLR first entry at $3.55 for 2 contracts (total value $710)

FSLR second entry at $2.90 for 2 contracts puts me at $3.225 average (total value $1,290)

I could have entered the second for 3 contracts and brought my average to $3.16 for a total value of $1,580. Seeing as my trade value is set at $736 the first trade is under and the total position puts me a bit over based on it counting as two trades.

When the stock moves I will see a higher absolute profit...if it moved against me the reverse is also true though. But that is the nature of the market.

Jeff.