Nothing is Final Until It’s Final

When BBB is $30, breaking even sounds like a wonderful idea and the options repair strategy looks like the greatest invention since sliced bread. So an investor purchases 4 of the 30 calls, writes 8 of the 35s and waits. BBB starts to show some life and rallies to $32. Encouraging. It continues to $35. Great, that’s our break even! But then, it doesn’t know when to stop and continues to $38 and $40. What have we done? We are about to be forced to sell our shares and break-even just when this stock (it’s a great stock as we’ve known all along) could be about to make us some money. Why did we enter into this repair strategy?

Relax. Look at the cost of getting out of the options’ position if BBB rallies to $40. The 4 long 30 calls will be worth $10 each, or a total of $4,000. The 8 short 35 calls will be worth $5 each, for a total of $4,000. The options’ position can be unwound by purchasing to close the 8 35 calls (cost: $4,000) and by selling the 4 long 30 calls (proceeds: $4,000). In other words, assuming BBB is trading at $40 close to expiration, it will be possible to unwind the options at little or no cost, giving us the opportunity to reassess our outlook for BBB and to decide if, yes, we are happy to just break-even and take our money out of this stock, or if we would rather re-establish a plain long position in this stock.