Stock repair strategy

Discussion in 'Options' started by l2tradr, Apr 7, 2008.

  1. l2tradr

    l2tradr

    Hi all,

    Quick question for those who might know if there is such a thing: I am familiar with the stock repair strategy if one was LONG the stock and it was down from the purchase price...is there such a thing as a stock repair strategy if one was SHORT the stock? I couldn't find it anywhere...
     
  2. MTE

    MTE

    The stock repair strategy uses a ratio call spread, so just use a ratio put spread to repair a short stock.
     
  3. l2tradr

    l2tradr

    If you have the time, can you please go into the details on how this can be achieved? Say I'm short Masteracard for 200 shares at $200 (fictional example). Thanks alot
     
  4. MTE

    MTE

    Since you mentioned that you are familiar with the long stock repair strategy then I assumed you are talking about the call ratio spread that is added to the long stock to "repair" it.

    In a long stock repair I'm referring to you buy a call at a lower strike and short two calls at a higher strike. Similarly, in a short stock repair you would buy a higher strike put and then sell two lower strike puts.

    The payoff is a mirror image of the long stock repair.

    Unless you were talking about some other repair strategy.
     
  5. l2tradr

    l2tradr

    Thank you for your response. I understand the actual strategy as far as the mechanics are concerned, the part that I am having some trouble with is choosing a strike price. If the stock I am short is trading at $200 and I am short at $190, which strike put do I buy and which strike put do I sell?
     
  6. MTE

    MTE

    The strikes to buy/sell depend on how much "repair" you want and what the current premiums are. Just open up the chains and test the various alternatives.
     
  7. Is it feasible to apply the stock repair strategy more than once, as in conjunction with averaging down?

    Walt
     
  8. Anything that improves your position is feasible.

    The repair strategy for long stock involves involves a ratio call spread. You buy a lower priced call and pay for it by selling 2 higher strike calls (per 100 shares). Ideally, it's put on at no cost. B/T the strikes, you recover $2 for every $1 the UL rises. It's also known as a covered call spread.

    If the UL does not cooperate, the option position is non performing and the entire position is essentially your long stock. You can repeat the repair strategy as often as you like but the more the UL drops, the harder it becomes to get a break even repair for zero cost. Eventually, the only no cost repair strategies available will lock in a loss.