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.
As the name suggests, a ratio of 2:1 is followed i.e. buy 1 ITM Call and simultaneously sell OTM Calls double the number of ITM Calls (In this case 2). This strategy is used by trader who is 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 since he is ..
Upper Breakeven Point = Strike Price of Short Calls + (Points of Maximum Profit / Number of Uncovered Calls), Lower Breakeven Point = Strike Price of Long Call +/- Net Premium Paid or Received
STOCK REPAIR Vs RATIO CALL SPREAD - When & How to use ?
STOCK REPAIR
RATIO CALL SPREAD
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 used by trader who is 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 since he is selling two calls.
Action
Buy 1 ATM Call, Sell 2 OTM Calls
Buy 1 ITM Call, Sell 2 OTM Calls
Breakeven Point
Upper Breakeven Point = Strike Price of Short Calls + (Points of Maximum Profit / Number of Uncovered Calls), Lower Breakeven Point = Strike Price of Long Call +/- Net Premium Paid or Received
STOCK REPAIR Vs RATIO CALL SPREAD - Risk & Reward
STOCK REPAIR
RATIO CALL SPREAD
Maximum Profit Scenario
Strike Price of Short Call - Strike Price of Long Call + Net Premium Received - Commissions Paid
Maximum Loss Scenario
Price of Underlying - Strike Price of Short Calls - Max Profit + Commissions Paid
Risk
Limited
Unlimited
Reward
Unlimited
Limited
STOCK REPAIR Vs RATIO CALL SPREAD - Strategy Pros & Cons
STOCK REPAIR
RATIO CALL SPREAD
Similar Strategies
Variable Ratio Write
Disadvantage
• Management required with all the positions. • Additional loss due to continuous decline in shares as downside risk remains unchanged.
• Unlimited potential loss. • Complex strategy with 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.
• Downside risk is almost zero. • Investors can book profit from share prices moving within given limits. • Trader can maximise profit when the share closes at the upper breakeven point.
