Stock Repair Option Trading Strategy – Know Everything
We have especially constructed this article, to give you a glimpse of what exactly Stock Repair options trading strategy is. You will find everything you need to know about Stock Repair strategy, in this article, at length.
Investing in stock options does result in losses. It happens sometimes even when the prices should rise. It is regardless of who you are and what you are investing in.
So such investors who incur losses on their stock option plan resort to generally three options of – selling and bearing the loss, holding on the stock and still hoping, or double down.
Holding and hoping takes a lot of time since this requires the stock to return at the normal purchase price.
The double down strategy requires throwing good money after bad, again in the hope for the stock to perform well.
After all, this comes as the fourth strategy which will assist the investor in reducing the break-even point. It happens without even taking any additional risk.
Also, we know it as the Stock Repair strategy as the name suggests.
About Stock Repair Option Strategy
Overall, it is a strategy to cover the loss from the losing stock option plan. It is a strategy which involves purchasing one call option. It also requires selling two call options for every 100 shares owned by the investors.
The premium raised from the sale of two call option plans will compensate. Or, it may cover the cost of one call option.
The result of this strategy gives a free options position to the investor. It allows breaking even the investor more easily and quickly.
The name suggests the work of this strategy that it helps repair the investment of the investor in certain loss-making stock options.
It is a simple method to recover the losses made in a long stock option plan due to a drop in the price of the stock and the strategy helps in making it easier to recover the losses from such stock options. We can use this strategy as a method where the investor loses money in the trade.
There are two main advantages we acknowledge by this strategy. There are no additional costs that come with it further. It implies one can cover the costs quickly.
They can do it even faster if the stock price moves upwards back to the price. The investor needs to assure just two transactions in the repair strategy.
There have to be enough money call options to buy and twice that to write it off.
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When to use a Stock Repair Option Trading Strategy?
As already known ,the investor will consider three actions when the stocks start making huge losses, firstly the investor might sell it and bear the loss or will invest more into the option, the holding strategy where the investors’ hopes for the prices to rise to break even.
The first possible actions among the ones are the ideal solution where there are significant losses to be borne. Cutting down the losses by selling and moving on, results in avoiding any further losses in such situations.
This becomes a sensible option when the loss doesn’t look like recovering. The second action can be adopted only if there are the right circumstances so that investing more capital would reduce the average cost per share. However, there is immense risk in whether it will only return good money after that.
The third possible strategy of holding the stock option plan and hoping for the price to reach break even point might result in a long waiting time with no clarity on the assurance of it happening.
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Benefits of Stock Repair Option Strategy
Now coming to the repair options strategy which has numerous benefits, we should consider upon all the mentioned above strategies if the investor seems to make a loss. The repair options strategy does not have any additional risk involved.
It is unlike investing more capital to reduce the average cost which involves too much risk in a situation of already loss incurring stock.
This strategy helps when the investor is not sure if the stock’s price will increase in future. It is if he is ambiguous about it reaching the break-even.
This strategy results in the reduction of the break-even point of the stock option of the original trade. This is a quite effective way of recovering the losses incurred by the stock option in a loss-making stage.
It is better than holding and hoping for the stock plan to increase. It may or may not reach the purchase price for attaining the break-even.
If the investor does not expect the prices of the stock option to rise but only fall, then the investor should be better at cutting off their losses.
And if the investor expects the prices to rise in the near future then this strategy is exactly something that the investor should go for. It will give astounding benefits to the investor.
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How to use Stock Repair Strategy?
Working with a Stock Repair options trading strategy is quite simple and easy, free of hassle. Initially, the investor has to place just two orders.
Firstly, the investor should open the order by using buy option and then purchase the calls having the strike price equal to the price of the current stock i.e., the money calls. The contracts purchased by the investor should be enough so as to cover the number of shares owned by the investor.
As typically, the option contract covers 100 shares so, the investor should buy one options contract for every 100 shares owned by him or her.
Then these options contract bought are sold using the sell to open order and then sell twice the number of calls just purchased.
The strike price for these option plans should be halfway between the price at which it is purchased and the current price of the stock option.
\The price of these options should also be half the price of the options that are bought by the investor. This can be cleared by the example stated below:
Example of Stock Repair Strategy
Take an example wherein an investor Mr X purchased 7000 shares of Dish for TV at INR 100 in April. Then the price of Dish for TV fell down to INR 90, which resulted in a loss of 70000.
After that X thinks the price will rise, but rather than doubling the quantity at the current prevailing price of 90, he opts for a Stock Repair strategy.
Now, this can work out by buying one May 90 call for INR 5 and then writing off two may call for INR 2 each. Net debit is attained by the investor by spread of INR 1 which sums up to INR 7000.
Now this 7000 will be the most loss that the investor has to bear if the Dish for TV stock falls below INR 90.
If the Dish for TV stocks fall down to 90, then both the call would expire without any worth and outcome, which would result in the loss of debit paid for INR 7000.
Whereas, if the stock would have been doubled by Mr X, at the price level of 90, then, he would have incurred a loss of INR 70000 (10*7000). The whole thing now shows that he is in a much better situation by applying this strategy.
If the Dish for TV stock would expire at INR 100 then this would become quite profitable for the investor under this strategy as he would gain maximum profit.
May 90 call will give a profit of INR 5 whereas May 100 call will expire worthless producing a profit of INR 4. So this will give an overall gain of INR 63000.
Conclusion: Stock Repair Option Trading Strategy
So Stock Repair options trading strategy is quite useful for the investor. It is to opt for in a situation of continued loss incurring stock option. It will not protect the investor in further reduction of price if this strategy is not in use.
Simply holding on to the stock and hoping for it to increase in price will mostly increase the loss of the investor. This strategy will ensure that the loss is reduced.
From the example above, we can see that if the call option further reduces in price then the loss will be much less.
It is less than if the investor might have doubled the investment. And, if the stock reaches the break-even then the written option which becomes worthless will produce gains. It further adds to the profit of the investor.
The investor expects some form of recovery when he or she holds a losing long stock option plan. Then this strategy of repair stock option is one of the best-recommended way forward for the investor.
This would further increase the chances of the investor to reach break-even.
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