Stock Repair with Options

The Stock Repair Strategy

Have you ever bought a stock and seen it go down? In need of stock repair? One way to try to recover is use the stock repair strategy. It can be used to lower your break-even point. What you do is sell a two by one call ratio spread on the underlying stock to adjust your cost basis lower. The trade can be put on for a small credit or a break even price. For example, our investor buys 200 XYZ at $27.50 for a total investment of $5,500 and it’s now at $20, or worth $4,000.  She would sell four $25 calls for $0.50 each and collect $200, then use those funds to buy two $22.50 calls for $1.  At no cost, the break-even point is now lowered to $25. If XYZ rises to $25 at expiration, the $22.50 calls would be worth $2.50 each or $500 and the $25 calls would expire worthless. So the 200 XYZ would be worth $5,000 and the two calls would be worth $500 for a total value of $5,500. The breakeven point has been lowered from the initial purchase price of $27.50 to $25.00 at no cost.


About sellacalloption

Author, Radio Show Host and Portfolio manager and chief option strategist for IWC Asset Management.

Posted on October 2, 2011, in Options for portfolio protection and tagged , , . Bookmark the permalink. Leave a comment.

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