top of page
Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Position management
Advanced, Hedging
Stock Repair Strategy
A strategy for reducing losses on a falling stock using a combination of options, with no additional costs.
Detail
The Stock Repair Strategy is designed for situations where an investor holds a stock that has fallen and does not want to sell at a loss. The goal is to use options to “fix” the price and reduce the average entry price without having to invest additional capital. Typically, it is implemented by purchasing a call option and writing two call options with a higher strike. The result is a limited profit as the stock rises, without further investment, and a reduction in the overall loss.
This strategy is suitable when the stock has lost value, but the investor does not want to sell it and believes in its partial recovery. The repair strategy consists of a combination of buying a call and writing two call options at a higher strike (ratio spread). If the stock rises, the investor realizes a profit up to the upper strike, thus reducing the average purchase price. The advantage is that the strategy usually does not require additional cash, as it is set as a zero (or minimal) debit/credit.
Optimal conditions
We hold the stock at a loss, we do not want to sell it at a loss, we expect a partial recovery (but not a return to the original price). Calm or slightly growing market. Higher implied volatility helps with the call statement.
Max profit
Limited: the difference between the current price and the strike of the written call + the premium received. Maximum profit achieved if the stock closes at the strike of the written call.
Max loss
Limited to further decline in the stock (same as holding the stock without hedging). If the stock does not rebound, the loss can increase.
Risks
Further decline in share price, limited profit if the stock breaks the strike of the written call. Need to hold the stock throughout the strategy.
Greeks
Delta: positive (long stock + option), increases as the stock rises. Theta: can be slightly positive due to the call statement. Vega: affected by changes in volatility (the call statement benefits from a decrease in IV).
Variations
A protective put can be added to limit losses (repair + collar combination). A ratio spread with other ratios (e.g. 1:3) can be used depending on the target and IV.
Usage example
We own 100 shares of XYZ, bought for $50, now they have dropped to $40. We want to reduce the average price. We buy 1x call strike 42 (exp. 30 days) and write 2x call strike 45. If the stock rises to $45, I will make a profit from the growth of the stock + the premium from the written call options + the profit from the long call option. Maximum profit between $42 and $45. If the stock stays below $42, we will make a profit from the premium from the written calls - the cost of the purchased call = mostly no effect.
DTE
Short to medium term (30-60 days), depending on the expected recovery of the stock.
IV (implied volatility)
Higher IV is advantageous for a call statement (larger premium), but affects the price of a long call. A slightly increased IV is ideal.
Premium
The strategy is often set as zero net debit/credit. It can be slightly credit or debit depending on the strike choice.
Margin
Yes, margin requirement for written calls (if shares are not fully covered).
Notes
Suitable for investors who want to improve the purchase price of a stock without further investment. It is necessary to understand the risk of further decline in the stock. Not suitable for rapidly declining stocks.
Tags
stock repair, repair strategy, loss management, options, stocks, call spread, call statement, call purchase, option strategy, position protection
bottom of page