Introducing The Amazing Stock Repair Strategy (4)

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 you purchase.)


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. 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 Stock Repair 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 strategy 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.