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Visually Analyze Option Strategies
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Stock repair strategy

 

The goal of the strategy is to bring down the break-even price, without having to assume any additional downside risk. The repair strategy is built around an existing stock position, usually a stock that is now trading at a lower price than the investor's original cost and is constructed by purchasing one call option and selling two call options for every 100 shares of stock owned.

 

Example

The investor bought 100 shares of ABC at $50 not too long ago, and the stock has since dropped to $40 . The investor dont want to put more money into the position is happy just to break even.

This investor could purchase 1 60-day ABC 40 call at $2.00 and simultaneously sell 2 60-day ABC 45 calls at $1.0. This is a zero cost trade .

Scenario 1

if at expiration the price of ABC has continued to decline and closes at $30, both the long 40 call and the short 45 calls will expire out-of-the-money and worthless.

Since this is a zero cost strategy it has no impact on the overall position. The investor's position will have the same loss as with just having the stock position alone.

The repair strategy has neither helped the original stock position nor increased its risk.

 

Scenario 2

If price of ABC closes at $45 on expiration, the investor's short 45 calls will expire exactly at-the-money and with no value. However, the investor's long calls will be in-the-money and worth $5.

So the loss in stock position = 500 $

profit from long options = 500$

Net profit/loss = 0

 

Scenario 3

If price of ABC closes at $50 on expiration.

Profit from stock position = 0;

Profit from long call position = 1*10*100$ = 100$

Loss from short call position = 2*5*100$ = 100$

Net Profit/Loss = 0

 

 
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