Profit and loss chart showing how this repair stock option bidding
strategy works at different stock price levels
The chart will show the stock price, the price of both the Feb.
30 and Feb 35 calls, the individual profit and losses of the
stock and the options and finally a profit/loss of the entire
position, assuming the original stock purchase price was $40
for our stock option bidding strategy
As you can see from the chart, the repair stock option bidding
strategy will get your position back to even at the same place
as doubling down would have, and in half of the move required
to recover your losses by just holding onto the stock. In our
example for this stock option bidding strategy, the prices are
constructed to make the calculations easier and to work out
so that the trade incurs no debit or credit. As mentioned previously,
it is not often that the numbers work out this evenly.
Ideally, this 1 x 2 spread will be purchased for a credit; that
is you will receive a little profit up front by doing the trade.
It will not be much, but this credit (profit) should be factored
into your return for the stock option bidding strategy.
If you cant get the spread for a net credit for this stock
option bidding strategy, it is important to note that the closer
to even that the trade sets up for, the better result you will
see from the trade. Remember, since the trade will be very close
to even to begin with, it is only important to note that the
closer the trade is to even, the better unless you can put
it on for a credit.
Conclusion to this stock option bidding strategy: The goal here
is to try to make back the money lost without the stock having
to trade all the way back to the original level. Doubling down
(also known as Dollar Cost Averaging) does accomplish this
but you must have substantial additional funds to cover another
stock purchase and you must be aware that you now have twice
the size of the position thus twice the risk if the stock continues
to trade down. This can translate into even larger losses on
continued downward movements.
Also note that repair stock option bidding strategy works best
on more volatile stocks trading in wide intraday ranges, because
the volatilities will be higher so you can generally sell the
out of the money calls for more money.
This stock option bidding strategy also works best on a stock
that recently declined rapidly, and lost 10 25% of its value
unexpectedly, because here you would most likely expect to see
some degree of technical bounce. Generally, you would also be
able to receive higher premiums from selling the out of the
money calls while volatilities are high, to offset more of the
cost of the at the money calls you would purchase.
Knowing this, the repair stock option bidding strategy, alleviates
the two major risks of the doubling down stock option bidding
strategy while still allowing for recapturing losses in less
of a move if the stock rebounds.
First, the reason we buy one option and sell two is so that
we do not have to put up additional capital, as you would have
to when doubling down. You may have to put out a small amount
of money if the 1 by 2 spread produces a debit, but it will
be pennies on the dollar compared to another stock purchase,
plus commission costs.
Second, repair stock option bidding strategy allows an investor
to recover from a loss with less of an upward move in stock
So, next time a stock that you own trades down sharply, in a
short amount of time, take a look at the option premiums and
see if the repair stock option bidding strategy
might work for