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 the investor requires downside protection for the short - to medium term but at lower cost. Buying protective puts can be an expensive proposition and writing OTM calls can defray the cost of the puts quite substantially. Protective Collar is considered as bearish to neutral strategy. In this strategy risk and reward is both are limited. This ..
STOCK REPAIR Vs PROTECTIVE COLLAR - When & How to use ?
STOCK REPAIR
PROTECTIVE COLLAR
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 when the investor requires downside protection for the short - to medium term but at lower cost.
Action
Buy 1 ATM Call, Sell 2 OTM Calls
• Short 1 Call Option, • Long 1 Put Option
Breakeven Point
Purchase Price of Underlying + Net Premium Paid
STOCK REPAIR Vs PROTECTIVE COLLAR - Risk & Reward
STOCK REPAIR
PROTECTIVE COLLAR
Maximum Profit Scenario
• Call strike - stock purchase price - net premium paid + net credit received
Maximum Loss Scenario
• Stock purchase price - put strike - net premium paid - put strike + net credit received
Risk
Limited
Limited
Reward
Unlimited
Limited
STOCK REPAIR Vs PROTECTIVE COLLAR - Strategy Pros & Cons
STOCK REPAIR
PROTECTIVE COLLAR
Similar Strategies
Bull Put Spread, Bull Call Spread
Disadvantage
• Management required with all the positions. • Additional loss due to continuous decline in shares as downside risk remains unchanged.
• Potential profit is lower or limited.
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.
