Important notice
The information on this web site is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Trading in stocks and options involves risk. You can lose money. You should always seek professional advice from your stock broker. We are not stockbrokers and do not make recommendations to buy or sell any stock or option. We provide educational information for your evaluation.

Return to Option Strategies

The objective of this strategy is to reduce the investor's break-even price.

This strategy is for an investor who owns shares in a stock whose current price is much lower than the price he paid for the stock.

Example: in December 2005 we bought XYZ stock at $70.00, however as of March 3, 2006, XYZ stock is now trading at $59.89.

There are four things an investor can do with the above situation.

1 Take the loss and move on to the next trade. This seems to be a wise action most of the time.

2 Hold on and hope that XYZ stock will retrace at least to a break-even situation.

3 Double up (average) on XYZ stock, to reduce break-even target, however this means another out lay of cash and no guaranties, that XYZ stock will not drop even further and compound the loss.

  

4 Stock repair strategy.

Under this strategy, we would purchase a call in or out of the money and write two covered calls out of the money, we would do this for every 100 shares we are holding on XYZ stock.

Calculations would have to be done, to assure us the best positions, how many months out and what would be the best strike prices.

In buying a Call Option we are laying out additional Cash, however in Writing the 2 Covered Calls we will receive additional cash, more then we are laying out.

This strategy allows the investor to receive additional premium each month or months, until the time that XYZ returns to the original purchase price, however there is a possibility that XYZ stock may not reach the original purchase price for a long time,if ever, yet premium could be received each month for writing the calls.