I've never done a "stock repair" before and am curious if this would be a viable strategy for some shares that I just found out were in a relative's portfolio that I inherited recently. The original position was 200 ABC at $100 cost basis. I'd like to get out of this position since I don't see a good reason to hold this particular position at the moment. Assuming the underlying moves as intended, to exit at breakeven (or at least less than the big loss now) would this work as a "stock repair" strategy? If ABC at $70 now, "double down" with another 200 shares....which should bring the position cost down to about $85. From there, employ a "stock repair" strategy (the 1x2 bull call ratio spread) to try and work for a breakeven exit at/around $85 barring any new disaster in the markets -- ie, 15 points is a bit easier to try and make up than 30. Assuming the underlying moves as intended, do such "stock repair" strategies work well? I've read about them, but never done, let alone recommended, it before myself. Any thoughts from those more knowledgeble than I? TIA.
rick, first clarification is YOUR basis in the inherited ABC stock is the price of the stock on the date of the decedent's death. It is not his/her cost basis. (IRS pub 17) -Don't double down if you don't believe the stock will rise. -1 by 2 ratio call spread works fine if the stock goes up, again do it if you believe the stock has a good chance at recovery and then some. - do an ATM CC on it and let it get called out or just sell it if there are better opportunities elsewhere. stock repair strats are only as good as your analysis and eventual rise/fall of the stock. So if its a position you would NOT chose to be in now...why bother to "repair" it?
Good point. "My" cost is actually a bit under 100 but I kept it simple in my description of the problem. It's not a huge position but enough that it warrants some experimentation of strategy on my part. I am optimistic about its long term prospects despite being neutral-to-slightly-bearish in the near term, so it might not be a bad thing to try and hold on to. I could dump the shares flat-out -- technically it's "found" money to me -- and take a short-term loss and look elsewhere, and yep, am considering that. Doing monthly CCs was something I already was thinking before I began reading into "repair" strategies. But even then, I'm not inclined to double-down on this thing right now but might consider some bullish ratio spreads along the way during the near-term. I'm just exploring my options (pardon the pun) here on a lazy afternoon..
If your optimistic about its long term prospects then there is nothing wrong with either doubling down or doing the 1X2 ratio spread a few months out. I'm not sure I would do both though. I have done it (ratio call spread) on stocks that had gone down but felt confident they would come back and it does work nicely when they do. Found money or not...its your money now
Don't call it a "repair strategy". Call it what it really is......"holding onto losers too long like a fool".
It's also worth what it's worth now. Forget your cost basis. You are holding some $70 shares. Do you think those shares are going to go up or not? If you don't, you should probably dump them. If you do, you should consider a variety of bullish strategies including the ones you suggested. Remember, simply holding on to the shares is also a bullish position. It's always okay to just do that.
I noticed the word bearish in "I am optimistic about its long term prospects despite being neutral-to-slightly-bearish in the near term, so it might not be a bad thing to try and hold on to." So the current long stock can bleed you if it continues down. Did you consider transforming it to a collar, and also open a bear OTM call spread? ( which it should be a fly if short calls are at same strike). This may help you get back part of your losses while protecting you on the down side. And you may repeat this multiple months if you really want to get even, assuming the stock cooperate. Good luck to you.
Buying more stock at a lower price is averaging down, not repairing. If there's no good reason to hold the stock now, sell it and buy it back (or another stock) when there is a good reason. If you're neutral on the stock, sell covered calls. Don't do the Covered Call Spread (the 1x2 bull call ratio spread) unless you are bullish on the stock. The short 2X short calls of the CCS will act as a drag prior to expiration. The underlying will have to rise a decent amount above the upper strike in order to get close to maxium gain. So the repair only works maximally at/above the upper strike AT expiration. If you choose to do the CCS, conventional wisdom is to do it for at least a break even so that you're playing with OPM (other people's money). If so, the CCS then mimics the underlying up to the lower strike.
I like that. Repairing has the implication that problems are over,while in fact problems can get even worse (for instance if stock goes down to say 50) if there is no floor on the low side. If you choose to do the CCS, conventional wisdom is to do it for at least a break even so that you're playing with OPM (other people's money). If so, the CCS then mimics the underlying up to the lower strike. [/QUOTE] Just to add for the nonfamiliar reader that the CCS would imply that the position becomes a short put. Which also has risk if stock goes below short strike. One can adjust things during trading days, but I do not like selling premium on stocks because of gaps! What if you wake up one day, and find your stock at a low price particularly in a market like the current market in which stocks can head south very fast.
As far as a short put goes, I'm not sure that we're on the same page here. The CCS consists of a covered call and a bullish call spread. The breakeven point is generally somewhere b/t the two strikes. If the stock is below the short strike but above the BE point, the position just doesn't make its full potential. One could argue that the CC is equivalent to a NP and go off on that tangent but the big picture is that if the CCS is done for at least no debit, the entire position acts like stock up to the long strike and then makes $2 for every $1 that the stock makes b/t the two strikes, with the maximum repair profit attained at or above the short strike at expiration.