Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Stock Repair Strategy

Example:               You bought 100 shares of XYZ stock at $70 and it is now trading at $60 

Outlook:                You are looking to recover your original investment with little or no additional risk.

Possible strategy:     Ratio Call Spread                                

                                 Buy one Oct 60 strike call at  $3.50

                                 Sell two Oct 65 strike calls at $1.75

                                                            Net Cost  $0.00

*All values shown are at the time of expiration. Commissions and other trading fees not included.

XYZ
Stock

XYZ Stock
Profit/(Loss)

Long 60 Call
Profit/(Loss)

Short 65 Calls Profit/(Loss)

Total
Profit/(Loss)

55

($1,500)

($350)

$350

($1,500)

60

($1,000)

($350)

$350

($1,000)

65

($500)

$150

$350

0

70

0   

$650

($650)

0

75

$500

$1,150

($1,650)

0

 

At Expiration:

  • Breakeven = XYZ at $65
    Loss on stock = Option profit
  • Maximum Loss = Cost of options (if any) + long stock risk   

In Summary: By doing the repair strategy you may be able to lower your long stock break-even point.  The two calls that you sold are covered by the call that you bought and your original 100 shares of XYZ stock.  The trade-off is that your upside profit potential has been capped.

  VIX Snapshot

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