Stock Repair Option Strategy
What are the characteristics of this option strategy?
Stock Repair option strategy is a type of options strategy used to revive a losing portfolio or recuperate losses in an individual stock position. It aims to reduce loss and bring down the cost basis by selling a call option expiring in the same time period. Alternatively, purchasing one call option and selling two call options, making the transactions “free”. This can reduce the volatility of the stock and become beneficial if done in the same option cycle where the losses have occurred.
Is this a bullish, bearish or neutral strategy?
Stock Repair option strategy can be used in both a bullish or bearish market. The strategy does not depend on predicting the direction of the market. It is an option selling strategy which is neutral in nature and doesn’t require a specific trend in the market.
Is this a beginner or an advanced option strategy?
The Stock Repair option strategy is considered to be a more advanced options strategy due to the need for a trader to understand the relationship between the stock and its options as well as understand implied volatility and time decay. The stock repair option strategy requires knowledge of option trading as well as the use of technical analysis in order to be successful.
In what situation will I use this strategy?
This strategy is useful when a trader wants to reduce the cost basis of their portfolio after losses incurred in a stock. It is also used when a trader is anticipating a bullish or bearish move but is uncertain of the direction and doesn’t want to risk the capital with a directional bets. In addition, this strategy is useful to traders who want to reduce the risk of their portfolio while still generating potential profits.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The stock repair option strategy typically falls in the middle of the range of risk-reward and probability of profit. This is due to the fact that the strategy involves selling the option, collecting a credit and holding the stock until the option expires. This strategy reduces risk by trading options but still offers a potential return if the stock moves favorably or the option is exercised.
How is this strategy affected by the greeks?
This strategy is affected by the greeks in multiple ways. The delta of the option being sold will affect the profits of the strategy as the delta is related to the probability of the option expiring in the money. Gamma will have a positive effect on this strategy as it increases the delta of the option being sold which can decrease the chances of profit. Vega will affect the value of the option sold with changes in the implied volatility of the stock. Theta will affect the time decay of the option, allowing the trader to collect the credit faster.
In what volatility regime (i.e VIX level) would this strategy be optimal?
This strategy is most optimal when the VIX level is high, as this increases the implied volatility of the stock and thus the value of the option that is sold. However, if the VIX level is too high then it may be beneficial to wait until it decreases in order to collect a higher credit from the option sale.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
In order to adjust this strategy when the trade goes against you, the trader may need to buy back the option that was sold earlier. This can increase the cost basis of the stock and help offset the losses. This strategy can be easy or difficult to adjust depending on the trader’s experience with options trading.
Where does this strategy typically fall in the range of commissions and fees?
This strategy can be relatively cheap in terms of commissions and fees due to the option being sold to collect a credit. The trader is typically charged a fee by their broker to open and close a position and to hold the position. However, the option fee will generally be covered by the credit collected from the sale of the option.
Is this a good option income strategy?
This strategy can be a good option income strategy if the trader is able to correctly identify when to sell the option and when the stock is expected to move favorably. The trader is able to collect the credit from the option sale which can be used to increase their overall portfolio income.
How do I know when to exit this strategy?
The trader should exit this strategy when the stock is no longer expected to move in the desired direction. The trader can also exit this strategy if the option is close to expiry and has already collected enough credit from the sale.
How will market makers respond to this trade being opened?
Market makers will typically bid or offer a price to buy or sell the option when it is opened. The market maker will generally provide a better price if they believe the option will become more valuable before the expiry date. The market maker will also be able to provide an implied volatility (IV) which can be useful for the trader in assessing the potential credit they can receive from selling the option.
What is an example (with calculations) of this strategy?
For example, a trader owns 100 shares of ABC company trading at $50. The trader is expecting ABC company to move favorably in the next few weeks, but is uncertain of the direction. The trader can sell 1 call option expiring in 4 weeks at the strike price of $50 for a credit of $1.00. This option brings the cost basis of the stock down from $50 to $49. The trader will make maximum profit if the stock price is less than $50 at expiry, otherwise the profit will be reduced if the stock price is higher than the strike price of $50 at expiry.
The value of the option will be affected by the underlying stock price and the delta, gamma, theta and vega of the option. The delta is affected by the stock price and time decay and the option value will decrease as the time expires. The gamma will affect the delta and can become beneficial if the stock is expected to move in the correct predicted direction. Finally, the vega affects the implied volatility and will increase the option value if the implied volatility increases.
MarketXLS and How it Can Help
MarketXLS is a powerful financial analysis tool that provides traders and investors the ability to track and analyze stocks in real-time. With MarketXLS, traders can easily monitor changes in the greeks and implied volatilities and make informed decisions when setting up the stock repair options strategy. Traders and investors can also use MarketXLS to quickly scan and filter stocks based on their risk and volatility profile in order to identify the stocks most suitable for this strategy.
Here are some templates that you can use to create your own models
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic