How Partial Sales and Additions Change Average Position Cost
Summary
The document explains two ways to calculate the average cost of a remaining spot position after partial sales and later additions. Its cash-flow method subtracts cumulative sale proceeds from cumulative purchase outlays, then divides by the units still held. This method allocates realized gains or losses from closed units across the remaining position, so selling below the original average raises the calculated cost and selling above it lowers the cost. Examples include transaction fees to show how they affect the result.
For traders who want to track only the cost basis of units still open, the document gives an alternative: leave the average unchanged when reducing the position, then combine the prior average cost and new purchase cost weighted by their respective quantities. These methods answer different accounting questions, so a strategy should choose one consistent with its profit and loss reporting. The discussion is limited to spot positions and does not address short positions, taxes, funding, or exchange-specific accounting rules.
Key ideas
- The cash-flow method divides net cumulative purchase outlays by the quantity that remains.
- Selling below the current average cost raises the cash-flow-based average, while selling above it lowers the average.
- Transaction fees affect the cash-flow calculation and should be included consistently.
- A remaining-units cost basis can instead ignore realized gains or losses and weight additions by their quantities.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.