Options Trading Strategies: Bullish - Stock Repair Strategy

Explanation

This strategy is used to cover up for losses made on long stock position. After the long position suffered losses on stock price fall, a trader will implement this strategy in order to bring down the breakeven price and capping his further losses thereby increasing his probability of loss recovery.

Construction

Buy 1 ATM Call
Sell 2 OTM Call Options

Example

Suppose Mr. X has purchased 1 lot of NIFTY Futures at 5400. Lot size of NIFTY is 50. Assume currently NIFTY is trading at 5200 translating it into loss of Rs. 10000 on his long position in future. (200*50)

Now, Mr. X wants to repair his position so he implements Stock Repair Strategy by buying 1 5200 NIFTY ATM Call Option at a premium of Rs. 100 and selling 2 5300 NIFTY OTM Call Options for a premium of Rs. 110 (55*2). By implementing this strategy Mr. X’s account will get credited by Rs. 500. [(100-110)*50]

Case 1: At expiry if NIFTY closes at 5100, then Mr. X will make a loss of Rs. 14500. [{(5100-5400) – (100) + (55*2)}*50]

Case 2: At expiry if NIFTY closes at 5300, then Mr. X will make a profit of Rs. 500. [{(5300-5400) – (100-100) + (55*2)}*50]

Case 3: At expiry if NIFTY closes at 5500, then Mr. X will make a profit of Rs. 500. [{(5500-5400) + (300-100) – ((200-55)*2)}*50]

Payoff Chart