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 involves buying of an underlying asset in the cash/futures market and simultaneously selling ATM Calls double the number of long quantity. This strategy is used by a 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.
Upper Breakeven Point = Strike Price of Short Calls + Points of Maximum Profit, Lower Breakeven Point = Strike Price of Short Calls - Points of Maximum Profit
STOCK REPAIR Vs RATIO CALL WRITE - When & How to use ?
STOCK REPAIR
RATIO CALL 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 used by a trader who is 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 Calls
Breakeven Point
Upper Breakeven Point = Strike Price of Short Calls + Points of Maximum Profit, Lower Breakeven Point = Strike Price of Short Calls - Points of Maximum Profit
STOCK REPAIR Vs RATIO CALL WRITE - Risk & Reward
STOCK REPAIR
RATIO CALL WRITE
Maximum Profit Scenario
Net Premium Received - Commissions Paid
Maximum Loss Scenario
Price of Underlying - Strike Price of Short Call - Net Premium Received OR Purchase Price of Underlying - Price of Underlying - Net Premium Received + Commissions Paid
Risk
Limited
Unlimited
Reward
Unlimited
Limited
STOCK REPAIR Vs RATIO CALL WRITE - Strategy Pros & Cons
STOCK REPAIR
RATIO CALL WRITE
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.
• 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.
