XYZ rises to $50 at expiration
Should XYZ rally back to the shares' initial purchase price of $50 by option expiration, the investor's position will be as follows:
- long 100 shares will break-even
- long 1 XYZ 40 call, now worth $10 (value at option's sale)
- short 2 XYZ 45 calls, each now worth -$5 (cost of options' repurchase)
The net value of the options equals zero: (-$5 purchase price x 2 contracts x 100) = ($10 sale price x 1 contract x 100) = $0. Since the values of the options cancel out and the stock is at its original cost, the overall position breaks even.
Above an XYZ price level of $50 at expiration, the investor will see a net loss on net option value. However, this option loss will be offset by the profit seen on the original share purchase. This is the "downside" of the repair strategy in this particular case: the best the investor can do with the total position is to break even.
If XYZ stock has risen to the original purchase price of $50 at expiration the investor might again become bullish on the stock and no longer be satisfied with just breaking even at the new reduced break-even point. In this case, the investor might liquidate the option position for little or no cost. If he sells the XYZ 40 call for its intrinsic value of $10 ($50 stock price - $40 strike price), and purchases the 2 XYZ 45 calls for their intrinsic value of $5 each ($50 stock price - $45 strike price), then he has closed the option position for no net cost beyond commissions. He would then be left with his original 100 shares of XYZ and be positioned to profit if they increase in price.