"Stock Repair using Options"
Ever have a long stock position that has gone south 10% or more on you? And you want to repair that damage? Regardless if the stock stays at the bottom or goes up? And if it does go down this strategy still will lower you break even point, and not increase your costs or loss?
NOW the STRATEGY which you can follow to fix it:
You own long shares and want to repair a loss ( you might also might believe the stock ain't coming back soon)
This strategy will NOT protect you against incurring further losses if the stock slides... BUT it will lower your break even point on the stock ( and important ..will NOT add to loses if the stock slips ) a win / win scenario ... you can also repeat this over and over till all your loss is recovered...and the cost is ZERO to do it...
SAY YOU purchased 100 shares of MSFT ( Microsoft ) for $85 and its now down at $75 ( or lower but its the procedure here were teaching) a potential loss of $1,000 ( $10sh loss X 100 sh)
SO Now.. ( I have to have a margin and options account )
I Buy... 1 CALL ( ATM) or At the Money ...stock is trading at $75 so I buy a $75 Call STRIKE ( thats ATM for newcomers ) with an expiration date as close to 30 days or so .( not to critical ) please use the next available option at least 3 weeks away
The Option Chain says .. IF I BUY this 1 Call I need $200 ( or $2 a share )
SO HEY ...I'm out another $200 ..( Damn Dean ) BUT WAIT...
Next YOU SELL 2 Calls that are OTM ( Out of the Money ) or at $80 Strike ( notice you sold 2 Calls and bought 1 so far) when you sell an option YOU get a credit back!
recap... you still have the stock, you bought 1 Call at $75 Strike ( ATM) and you SOLD 2 Calls ( OTM $80 Strike ) ...for a credit !
The option chain shows that selling 2 calls at $80 strike is a credit of $100 per call or $200 NET Credit..
The entire transaction is only commissions.. almost ZERO...
YOU hearing this ????
recap .. now I own 100 shares and I bought 1 Call and sold 2 calls .. the entire transaction costs ZERO..
WAIT it gets better...
OK what happens.. stock doesn't MOVE... in basic Options you learn that the OTM ( options you sold ) and OTM will decay to Zero .. giving you a $200 gain on the $80 strike Options on expiry day.. .. since the 1 ITM Call ( $75 strike ) is still ATM it can be sold for a small gain before the OTM calls expire.. maybe..maybe giving you another $75 ...total gain. even if EVEN the stock stood still is + $275 gained against your $1,000 loss... net loss $750... ok...( very realistic )
NEXT CASE ...the stock gains $5 ( half of the drop ) stock now goes to $80 dollars from $75 ( where I started this strategy )
with the stock UP to ($80) at only half the loss look what happens..
the ATM option ( Strike $75 ) is now $5 higher than its strike a CALL gain of $500.... OK... easy to see...
BUT wait ...so did the stock ! The stock gains $500 TOO :)
NOW since the 2 Sold options are ATM they will expire worthless on expire day giving me another $200 gain ( we sold for $100 credit each) SO the 2 OTM calls expire worthless and give me $ 200 more dollars..
WAIT what is happening.. ?? we already have no more loss at all. with half the move...
Next Case...NOW stock slides ...$5 to $70 ( wooo big hit )
so here is what happens..
since the stock price is below ALL strikes
We gain on both of the OTM Calls or $200 right ..
We lose on the 1 ATM Call ( $200 ) and we don't add any more loss than what the stock is going to do from here..
BUT for ZERO dollars I brought my chances of getting way more money back than waiting for a full $10 stock recovery
I did not add to the loss if the stock went south
I lowered my breakeven point by easy 50%
AND I can repeat this again... this is the power of options in a conservative way...
Options are cool .. if used correctly