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 is implemented by a trader when he is neutral on the movements and bullish on volatility i.e. he expects the stock to move in either direction with high magnitude. This strategy involves buying 1 ITM Call Option and 1 ITM Put Option. This strategy can be called as Debit Spread because trader’s account is debited at the time of entering the positions.< ..
Upper Breakeven Point = Net Premium Paid + Strike Price of Long Call, Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid
STOCK REPAIR Vs LONG GUTS - When & How to use ?
STOCK REPAIR
LONG GUTS
Market View
Bullish
Neutral
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 is implemented by a trader when he is neutral on the movements and bullish on volatility i.e. he expects the stock to move in either direction with high magnitude.
Action
Buy 1 ATM Call, Sell 2 OTM Calls
Buy 1 ITM Call, Buy 1 ITM Put
Breakeven Point
Upper Breakeven Point = Net Premium Paid + Strike Price of Long Call, Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid
STOCK REPAIR Vs LONG GUTS - Risk & Reward
STOCK REPAIR
LONG GUTS
Maximum Profit Scenario
Price of Underlying - Strike Price of Long Call - Net Premium Paid OR Strike Price of Long Put - Price of Underlying - Premium Paid
Maximum Loss Scenario
Net Premium Paid + Strike Price of Long Put - Strike Price of Long Call + Commissions Paid
Risk
Limited
Limited
Reward
Unlimited
Unlimited
STOCK REPAIR Vs LONG GUTS - Strategy Pros & Cons
STOCK REPAIR
LONG GUTS
Similar Strategies
Short Put Ladder, Strip, Strap
Disadvantage
• Management required with all the positions. • Additional loss due to continuous decline in shares as downside risk remains unchanged.
• More commission involved than simply buying call or put option. • Expensive.
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.
• Investors can get unlimited profit if the underlying asset goes up or down. • Ability to profit no matter if the market goes in either direction. • Limited loss.
