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 adopted by traders who are bullish in nature. He expects market and volatility to rise in the near future. A trader need not be direction specific here (i.e. an upward or downward trend, but a small bias towards an uptrend should always be present, as the gains will be much higher once the market moves up r ..
Lower breakeven = strike price of the short call, Upper breakeven = strike price of long calls + point of maximum loss
STOCK REPAIR Vs CALL BACKSPREAD - When & How to use ?
STOCK REPAIR
CALL BACKSPREAD
Market View
Bullish
Bullish
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 when the investor expects the price of the stock to rise in the future.
Action
Buy 1 ATM Call, Sell 2 OTM Calls
Sell 1 ITM Call, BUY 2 OTM Call
Breakeven Point
Lower breakeven = strike price of the short call, Upper breakeven = strike price of long calls + point of maximum loss
STOCK REPAIR Vs CALL BACKSPREAD - Risk & Reward
STOCK REPAIR
CALL BACKSPREAD
Maximum Profit Scenario
Unlimited profit potential if the stock goes in upward direction.
Maximum Loss Scenario
Strike Price of long call - Strike Price of short call - Net premium received
Risk
Limited
Limited
Reward
Unlimited
Unlimited
STOCK REPAIR Vs CALL BACKSPREAD - Strategy Pros & Cons
STOCK REPAIR
CALL BACKSPREAD
Similar Strategies
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Disadvantage
• Management required with all the positions. • Additional loss due to continuous decline in shares as downside risk remains unchanged.
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.
