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.
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 .
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.
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
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