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 simply the reversal of the Synthetic Call Strategy. This strategy is implemented when a trader is bearish on the market and expects to go down. Trader will short underlying stock in the cash market and buy either an ATM Call Option or OTM Call Option. The Call Option is bought to protect / hedge the upside risk on the short position. The ..
STOCK REPAIR Vs PROTECTIVE CALL - When & How to use ?
STOCK REPAIR
PROTECTIVE CALL
Market View
Bullish
Bearish
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 when a trader is bearish on the market and expects to go down.
Action
Buy 1 ATM Call, Sell 2 OTM Calls
Buy 1 ATM Call
Breakeven Point
Sale Price of Underlying + Premium Paid
STOCK REPAIR Vs PROTECTIVE CALL - Risk & Reward
STOCK REPAIR
PROTECTIVE CALL
Maximum Profit Scenario
Sale Price of Underlying - Price of Underlying - Premium Paid
Maximum Loss Scenario
Premium Paid + Call Strike Price - Sale Price of Underlying + Commissions Paid
Risk
Limited
Limited
Reward
Unlimited
Unlimited
STOCK REPAIR Vs PROTECTIVE CALL - Strategy Pros & Cons
STOCK REPAIR
PROTECTIVE CALL
Similar Strategies
Put Backspread, Long Put
Disadvantage
• Management required with all the positions. • Additional loss due to continuous decline in shares as downside risk remains unchanged.
• Profitable when market moves as expected. • Not good for beginners.
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.
• Limited risk if the market moves in opposite direction as expected. • Allows you to keep open a profitable position to make further profits. • Unlimited profit potential.
