Equity Option Strategies - Stock Repair

The Equity Strategy Workshop is a collection of discussion pieces followed by interactive worksheets. The workshop is designed to assist individuals in learning how options work and in understanding various options strategies. These discussions and materials are for educational purposes only and are not intended to provide investment advice.

Investment decisions should not be made based upon worksheet outcomes.

Access to, or delivery of a copy of, the Options Disclosure Document must accompany this worksheet.

Who Should Consider Using the Stock Repair Strategy?

  • An investor who owns shares purchased at a price well above the current market price, and whose goal is to simply break-even on this position
  • An investor who is willing to give up any profit potential above the new, reduced break-even point
  • An investor who is unwilling to commit additional funds to the current losing stock position

The goal of the strategy is to reduce the investor's break-even price, without having to assume any additional downside risk.

Please note: This transaction must be done in a margin account.

Definition

An investor has bought shares in a non-optionable stock and has seen its value decline after purchase. He is now simply looking to break-even and has two choices: "hold and hope" or "double up."

The "hold and hope" strategy requires that the stock retraces its fall all the way back to the investor's purchase price, an event that may be a long time in the making. The "double up" strategy, i.e., purchasing additional shares at a now lower price, does lower the investor's break-even point, but it requires that additional funds be committed to the strategy. It also increases the downside risk of the position by the additional shares purchased. However, an investor who has an unrealized loss on an optionable stock has a third alternative: the repair strategy.

The repair strategy is built around an existing stock position, usually a stock that is now trading at a lower price than the investor's original cost. For every 100 shares held, 1 call option is purchased and 2 call options with a higher strike price are sold, with all options having the same expiration month. These purchases and sales are structured so that the investor's cash outlay is minimal or none.

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