Is This Too Good to Be True?

Is this strategy starting to sound like the proverbial free lunch? Lower break-even, no (or little) additional capital required, and no increase in the position’s downside risk? It sounds like all benefits and no costs. But there is an opportunity cost. Look at the table above. If BBB rallies past $35 to $37.50 (or to any higher price for that matter) the total value of the position is $40, the same as when BBB reaches $35.

The “cost” of this strategy is that in the best-case scenario we will break-even. We can do no better. But remember what our primary objective was when the stock was $30 and we were thinking of doubling-up.

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