Introducing the amazing repair stock option trading strategy.
This stock option trading strategy involves buying one at-the-money
call option while simultaneously selling two out-of-the-money
call options on the same stock, in the same month.
The construction of this stock option trading strategy
First, you must make sure to purchase exactly the equivalent
amount of at-the-money call options as shares of stock you own.
Remember, each option contract is worth 100 shares. So if you
own 500 shares, then you would purchase 5 at-the-money calls.
If you owned 3000 shares then you would purchase 30 at-the-money
Now that you have purchased the correct and exact amount of
at-the-money calls, you then must sell exactly twice the amount
of out-of-the-money calls for this stock option trading strategy
to work. Again, it is imperative that you sell exactly two times
the amount of out-of-the-money calls as the amount of at-the-money
calls you own.
Looking at the case in which you owned 500 shares and bought
5 at-the-money calls, you would then have to sell 10 out-of-the-money
calls to properly construct the repair stock option trading
Likewise, in the case where you owned 3000 shares and bought
30 at-the-money calls, you would then have to sell 60 out-of-the-money
calls for proper repair stock option trading strategy construction.
Heres why you must follow these steps for this stock option
trading strategy to work. The 500 shares of stock you have,
along with the 5 call options you just bought, will result in
an even spread trade. The reason this is important is because
without owning the equivalent of 10 calls (or 1000 shares of
the underlying stock), then the 10 out of the money calls you
sell would be considered naked and may require an additional
margin requirement in this stock option trading strategy.
Selling naked calls is considered risky. However, by owning
1000 shares of stock (or 10 call options) at a lower price,
your risk is limited because your sold calls are considered
The chart below shows some examples of the correct repair stock
option trading strategy ratios.
The total dollar value of the options' trade should be neutral
or very close to neutral. In this way, you can establish the
position without putting out any more money or at least very
In some cases, you can even put on this trade for a credit,
whereby you can sell the out of the money calls for more than
you paid for the at the money calls. This scenario is ideal,
because then you also profit from this part of the trade also
known as a credit spread. (Remember, you will be selling the
out of the money calls in a 2:1 ratio to the at the money calls
The out of the money calls will invariably be cheaper than the
calls you buy, but the 2:1 ratio makes up for the difference
in pricing. The easiest way to explain this is by example. Again,
we will go back to our XYZ example for this stock option trading
strategy. You have purchased 500 shares of XYZ for $40.00. The
stock then trades down to $30.00 leaving you with a $5,000 loss.
At this point, at $30.00, you would construct the repair stock
option trading strategy. (Option prices are for example purposes
only.) You would buy 5 February 30 calls for $1.50 and sell
10 February 35 calls for $.75 each. This stock option trading
is known as a 1 by 2 spread.
Now that the position is in place, you are long 500 shares of
XYZ, long 5 February 30 calls and short 10 February 35 calls.
Just to clarify, if you were long 1000 shares of stock, then
you would also be long 10 February 30 calls, and short 20 February
35 calls. Remember, the ratio of stock, to purchased calls,
to sold calls is 1:1:2.