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 selling (short) the underlying asset in the cash/futures market. Simultaneously, sell ATM Puts double the number of long quantity. This strategy is used by a trader who in neutral on the market and bearish on the volatility in the near future. Here profits will be capped up to the premium amount and risk will be potentially unlimited. ..
Max Profit Achieved When Price of Underlying = Strike Price of Short Puts
Risk Profile
Limited
Loss Occurs When Price of Underlying < Strike Price of Short Put - Net Premium Received OR Price of Underlying > Strike Price of Short Put + Net Premium Received
Breakeven Point
Upper Breakeven Point = Strike Price of Short Puts + Points of Maximum Profit Lower Breakeven Point = Strike Price of Short Puts - Points of Maximum Profit
STOCK REPAIR Vs RATIO PUT WRITE - When & How to use ?
STOCK REPAIR
RATIO PUT WRITE
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 selling (short) the underlying asset in the cash/futures market. This strategy is used by a trader who in neutral on the market and bearish on the volatility in the near future
Action
Buy 1 ATM Call, Sell 2 OTM Calls
Sell 2 ATM Puts
Breakeven Point
Upper Breakeven Point = Strike Price of Short Puts + Points of Maximum Profit Lower Breakeven Point = Strike Price of Short Puts - Points of Maximum Profit
STOCK REPAIR Vs RATIO PUT WRITE - Risk & Reward
STOCK REPAIR
RATIO PUT WRITE
Maximum Profit Scenario
Net Premium Received - Commissions Paid
Maximum Loss Scenario
Price of Underlying - Sale Price of Underlying - Net Premium Received OR Strike Price of Short Put - Price of Underlying - Net Premium Received + Commissions Paid
Risk
Limited
Unlimited
Reward
Unlimited
Limited
STOCK REPAIR Vs RATIO PUT WRITE - Strategy Pros & Cons
STOCK REPAIR
RATIO PUT WRITE
Similar Strategies
Short Strangle and Short Straddle
Disadvantage
• Management required with all the positions. • Additional loss due to continuous decline in shares as downside risk remains unchanged.
• Potential loss is higher than gain. • Limited profit.
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.
