option-info and options-graphs sites:
Repair" or "Stock Rescue" are names given to an option strategy that
is designed to lower your breakeven price on a stock position. In other
words, by using options, you make enough of a gain on the options to be
able to sell your stock at a loss, but break even overall.
trying to "bottom fish" or "average down", the option strategy can
often be done with no additional risk of capital, or sometimes a slight
additional risk. The strategy normally will not do much better than breakeven
overall, so your risks are that you give up any possible gains in the
stock, and you will still have a loss if the stock does not rise enough.
are the steps you need to take:
up on the stock getting back to your buy price any time soon. If
you think the stock alone might get back to breakeven or better, then
just wait for that to happen.
stock must have a reasonable chance of reaching the OTM strike price
in step 4 by the expiration date. A stock you bought at $30, and is
now at $25, has a reasonable chance of reaching $27.50 in three months.
If your stock has fallen to $5, you won't be able to break even at any
strike price. If that is the case, you could target $10, and just be
happy to do that much better than selling at $5. Or just wait for the
stock to recover enough to make the breakeven strike price reasonable.
one ATM call expiring in three months or more, for each hundred
shares of stock you own.
twice that many OTM calls with the same expiration date as the long
two OTM calls you sell should bring in about as much premium as
you spend on the one long call, thus allowing you to enter the position
at little or no cost. This is dependent on the implied volatility of
the options. A higher IV makes it more likely that you can enter at
no cost or even a credit. Also, options expiring in just one or two
months probably won't allow you to enter the trade at no cost.
far as your broker is concerned, your position will consist of covered
call(s), which almost everyone has permission to do, and bull call(s).
If you don't already have permission to trade spreads like bull calls,
arrange that with your broker first, usually by filling out an application.
is a partial workaround if you do not have permission to trade spreads
like bull calls and your broker will not grant permission anytime soon,
as long as you do have permission to trade covered calls and long calls.
You can sell OTM covered calls against all of your stock holdings, and
buy half that number of ATM long calls. For instance, if you have 1000
shares, sell ten OTM calls against the stock, and buy five ATM long
calls. This will allow you to get out of half your position at breakeven
if the stock moves favorably. And as a matter of fact, if the position
does reach breakeven on half the shares, you are in a better position
to gain on the other half. So you might consider this strategy if you
think there is some possibility of your stock recovering on it's own.
and results of this trade can be shown as follows:
of 1000 shares of stock at $30 = $30,000.00
stock at $25, showing a $5,000 loss: Buy ten 25 strike calls expiring
in three months, IV 40%: $1.98 each = $1980.00 debit
twenty 27.5 strike calls expiring in three months, IV 40%: $1.04 each
= $2080.00 credit
credit on options = $100.00
at or over $27.50 on expiration date in three months:
- Ten short
calls call you out of stock at $27.50, but you keep premium of $1.04,
(2.5-1.04)x1000 = loss of $1460.00
- Ten bull
call spreads make difference in strike prices, less initial debit =
(2.5-.94)x1000 = $1560.00
gain or loss at $27.50 or above = $100.00
is at exactly $27.50 on expiration date, you do $2.50x1000 + $100.00
better = $2600.00 better than just holding stock.
is at $30.00 on expiration date, you do $100.00 better than just holding
is at $32.50 on expiration date, you do $100.00 - $2.5x1000 = $2400.00
worse than holding stock, but the loss is a loss of opportunity, not cash.
below shows the position if you are only able, or only want to write
short calls to take you out of half the stock. Notice that if the stock
exceeds your goal and gets back to 30, the position does as well as holding
the stock alone.