Averaging Through Derivative Instruments

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Stock Option Repair Strategy


What is Stock Repair strategy?

As the name suggests, Stock Repair strategy is another strategy to get over loss that a stock has suffered thanks to fall in value. The Stock Repair strategy helps in sick losses with simply a moderate rise within the value of the underlying stock.

Why to Initiate Stock Repair strategy?

Stock Repair strategy is initiated to get over the losses and exit from loss creating position at breakeven of the underlying stock.

Who will initiate Stock Repair strategy?

A Stock Repair strategy ought to be enforced by investors United Nations agency ar trying forward to average their position by shopping for further stocks in money once the underlying stock value is falling. rather than shopping for further stock in money one will apply stock repair strategy.

When to initiate Stock Repair strategy?

A Stock Repair strategy ought to be initiated only if the stock that you simply ar holding in your portfolio has corrected by 10-20% and as long as you think that that the underlying stock can rise moderately in close to term.

Let’s associate degreed} perceive with an example:

DISHTV earlier Bought at Rs100
Quantity bought7000
DISHTV Current spot price (Rs)100
DISHTV earlier Bought at Rs90
Buy 1 ATM Call of strike price (Rs)90
Premium paid (Rs)5
Sell 2 OTM Call of strike price (Rs)100
OTM call price per lot (Rs)2
Premium received (Rs) (2*2)4
Break even95.5
Lot Size7000
Net Premium paid (Rs)1

For example, associate degree capitalist A, had bought seven,000 shares of DISHTV at Rs100 in Gregorian calendar month, however the worth of DISHTV has declined to Rs90, leading to to notional loss of Rs70,000. A thinks that worth can rise from this level, therefore instead of doubling the amount at current worth, here he will initiate the Stock Repair strategy. this will be initiated by shopping for one could ninety require Rs5 and marketing 2 could one hundred require Rs2 every. cyberspace debit paid to enter this unfold is Rs1 amounting to Rs7,000, {which can|which can|which is able to} be the most loss from repair strategy that A will face if DISHTV falls below Rs90.

If DISHTV expires at Rs80 level, then each the calls would expire trifling, leading to loss of the debit paid of Rs7,000, because the internet price to initiate Stock Repair strategy is Rs1 per ton. Had A doubled his position at Rs90 level, then he would have lost Rs70,000 (10*7000). This shows he’s far better off by applying this strategy.

If DISHTV expires at Rs100 then this may be the most effective case situation wherever most profit are going to be achieved. could ninety decision bought would lead to to profit of Rs5, whereas could one hundred decision oversubscribed can expire trifling leading to to achieve of Rs4. internet gain would be Rs63,000 (9*7000).

Comparison:

A initiated stock repair strategyB Doubled his position at lower level
MarginOnly margin money is required to initiate stock repair strategyFull amount has to be paid in cash for taking delivery of stock
Interest Loss (1 month)1,50,000*0.08/12=1000630000*0.08/12= 4200
RiskRisk associated is limitedIt involves high risk when the stock price falls
BrokerageBrokerage in Options is comparatively less.Brokerage paid to initiate position is higher as compared to Options.

The Payoff chart:

Analysis of Stock Repair strategy:

The Stock Repair strategy is appropriate for Associate in Nursing capitalist UN agency is holding a losing stock and desires to scale back breakeven at little or no or no value. This strategy helps in minimizing the loss at terribly low value as compared to “Doubling Down” of position.