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 similar to Short Straddle; the only difference is of the strike prices at which the positions are built. Short Strangle involves selling of one OTM Call Option and selling of one OTM Put Option, of the same expiry date and same underlying asset. Here the probability of making profits is more as there is a spread between the two strike prices, and if ..
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
STOCK REPAIR Vs SHORT STRANGLE - When & How to use ?
STOCK REPAIR
SHORT STRANGLE
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 perfect in a neutral market scenario when the underlying is expected to be less volatile.
Action
Buy 1 ATM Call, Sell 2 OTM Calls
Sell OTM Call, Sell OTM Put
Breakeven Point
Lower Break-even = Strike Price of Put - Net Premium, Upper Break-even = Strike Price of Call+ Net Premium
STOCK REPAIR Vs SHORT STRANGLE - Risk & Reward
STOCK REPAIR
SHORT STRANGLE
Maximum Profit Scenario
Maximum Profit = Net Premium Received
Maximum Loss Scenario
Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received
Risk
Limited
Unlimited
Reward
Unlimited
Limited
STOCK REPAIR Vs SHORT STRANGLE - Strategy Pros & Cons
STOCK REPAIR
SHORT STRANGLE
Similar Strategies
Short Straddle, Long Strangle
Disadvantage
• Management required with all the positions. • Additional loss due to continuous decline in shares as downside risk remains unchanged.
• Unlimited loss is associated with this strategy, not recommended for beginners. • Limited reward amount.
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.
• Higher chance of profitability due to selling of OTM options. • Advantage from double time decay and a contraction in volatility. • Traders can book profit when underlying asset stays within a tight trading range.
