Suppose, you are stuck with a stock that has declined 20% and seems unlikely to recover for a long time. You can use this safe options strategy in a strategic way to unload your stock at breakeven. This stock repair strategy not only helps you recoup your initial investment but also frees up cash for new better opportunities.
When to use this stock loss strategy? Anyone who is stuck with a stock that has gone down 15% to 25% in its value and is not expected to recover for a long time. If you use this strategy, you should be prepared to forgo any profits in case the stock recovers in value just in order to make your initial investment breakeven. How to setup this stock repair strategy? For each 100 shares of the stock that you had bought, buy one call option on that stock at a strike price below its current price.
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Sell two call options or in other words write two call options for each 100 shares of stock that you need to repair at a strike price above the current share price. The two options that you buy and sell should have the same expiration date within the next 90 days.
This stock repair strategy does not bring new risk to your position. The first of the two call options that you write is covered by the 100 shares of stocks that you own. The second call options that you wrote is covered by the call options that you just bought.
Let's see how it works! Suppose you buy stock ABC at $50 per share. It is down to $40, a 20% decrease. Now you don't expect any recovery in the stock price for a long time. You purchase one call option for 100 shares $40 that expires in the next two months. You pay a premium of $3 for the call option. You sell two call options for $45 at $1.5 each.
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Suppose the stock declines to $35. The two call options that you sold expire and the call option that you bought also expires. You lose nothing. You can try this strategy again.
Now, let's suppose instead of the price going down, the stock recover a little bit and the price rises to $43 per share. The call options that you sold make you $3 each. So you make $6 while the call option that you bought expires. This way, you have lowered your loss to $4 per share. You can try this stock repair strategy again for further reducing the loss and making breakeven!
Suppose the stock price rises to $50. You breakeven, the options cancel each other and you don't lose anything. Now, suppose the stock price goes above $50 to $55 per share. All options cancel each other; you can still sell the stock at breakeven for $50 and forgo the profit of $5 per share in this case. Now this stock repair strategy works best when your stock has lost value close to 20% of your initial investment!
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