← Strategy LabLesson 14 · 4:20
Stock repair
Summary
Use stock repair when you bought shares higher, at $108 in the example, they now sit at $100, and you want to get back to even sooner without new money: buy one $100 call for $3.45 and sell two $104 calls for $1.87 each, a $29 credit. The most you can make is $29 above $104, and you keep the whole risk of the shares, losing $10,771 if XYZ went to zero. Your break-even drops from $108 to $103.86.
Key terms
- stock repair
- Adding one bought call and two sold calls at a higher strike to shares that have fallen, for about nothing, to bring the break-even down.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
- bought call
- sold call
- credit
- Cash you receive when you open a trade because what you sell brings in more than what you buy, $29 in the repair.
- called away
- Having your shares sold at the strike price because you were assigned on a call you sold.
- T plus zero line
- The blue line on the chart showing your result today, if you closed the trade right now.
- ratio
Check yourself
Answer each question to see why the right answer is right.
1. What two trades does the repair add to the shares bought at $108?
2. XYZ ends at $110. What is your result with the repair?
3. XYZ ends at $90. What is your result with the repair?
4. Why does the result climb twice as fast between $100 and $104?
5. Where is the break-even after the repair?
Finished the video and the quiz? .