Stock Repair Strategy is used to cover up for losses made on long stock position. After the long position suffered losses on stock price fall, a trader will implement this strategy in order to bring down the breakeven price and capping his further losses thereby increasing his probability of loss recovery.
This strategy protects an investor from unfavourable price movements in the position but limits the profits can be made on that position. A risk reversal is a hedging strategy that protects a long or short position by using put and call options. In this one option is buying and other is written. In this strategy the trader has to pay a premium, while the written option prod ..
STOCK REPAIR Vs RISK REVERSAL - When & How to use ?
STOCK REPAIR
RISK REVERSAL
Market View
Bullish
Bullish
When to use?
Stock Repair Strategy is used to cover up for losses made on long stock position. After the long position suffered losses on stock price fall, a trader will implement this strategy in order to bring down the breakeven price and capping his further losses thereby increasing his probability of loss recovery.
This strategy can be used for hedging. When an investor want to protect long or short position by using a call and put option.
Action
Buy 1 ATM Call, Sell 2 OTM Calls
This strategy work when an investor want to hedge their position by buying a put option and selling a call option.
Breakeven Point
Premium received - Put Strike Price
STOCK REPAIR Vs RISK REVERSAL - Risk & Reward
STOCK REPAIR
RISK REVERSAL
Maximum Profit Scenario
You have unlimited profit potential to the upside.
Maximum Loss Scenario
You have nearly unlimited downside risk as well because you are short the put
Risk
Limited
Unlimited
Reward
Unlimited
Unlimited
STOCK REPAIR Vs RISK REVERSAL - Strategy Pros & Cons
STOCK REPAIR
RISK REVERSAL
Similar Strategies
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Disadvantage
• Management required with all the positions. • Additional loss due to continuous decline in shares as downside risk remains unchanged.
Unlimited Risk.
Advantages
• This strategy creates an opportunity to recover losses by lowering our breakeven. • No margin required. • No additional downside risk and costs nothing to put on.
