What is Stock Repair strategy?

Nilesh Jain

30 May 2017

New Page 1

As the name suggests, the Stock Repair strategy is an alternative strategy to recover from loss that a stock has suffered due to fall in price. The Stock Repair strategy helps in recovering losses with just a moderate rise in the price of the underlying stock.

Why to Initiate Stock Repair strategy?

Stock Repair strategy is initiated to recover from the losses and exit from loss making position at breakeven of the underlying stock.

Who can initiate Stock Repair strategy?

A Stock Repair strategy should be implemented by investors who are looking forward to average their position by buying additional stocks in cash when the underlying stock price is falling. Instead of buying additional stock in cash one can apply stock repair strategy.

Stock Repair strategy?

A Stock Repair strategy should be initiated only when the stock that you are holding in your portfolio has corrected by 10-20% and only if you think that the underlying stock will rise moderately in near term.

How to Construct the Stock Repair strategy?

  • Buy 1 ATM call
  • Sell 2 OTM calls

Stock Repair strategy is implemented by buying one At-the-Money (ATM) call option and simultaneously selling two Out-the-Money (OTM) call options strikes, which should be closest to the initial buying price of the same underlying stock with the same expiry.

Strategy Long Stock, Buy 1 ATM Call and Sell 2 OTM Call
Market Outlook Mildly Bullish
Motive Recover loss with limited risk
Break even (Strike price of buy call + strike of sell call + net premium paid)/2
Risk Net premium paid, Drop in price of holding stock
Reward Average of difference between strike price-net premium paid
Margin required Yes

Let’s try to understand with an example:

DISHTV earlier Bought at Rs 100
Quantity bought 7000
DISHTV Current spot price (Rs) 90
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 even 95.5
Lot Size 7000
Net Premium paid (Rs) 1

For example, an investor Mr. A had bought 7000 shares of DISHTV at Rs 100 in April but the price of DISHTV has declined to Rs 90, resulting in to notional loss of Rs 70,000. Mr. A thinks that price will rise from this level so rather than doubling the quantity at current price, here he can initiate the Stock Repair strategy. This can be initiated by buying one May 90 call for Rs 5 and selling two May 100 call for Rs 2 each. The net debit paid to enter this spread is Rs 1 amounting to Rs 7000, which will be the maximum loss from repair strategy that Mr. A will face if DISHTV falls below Rs 90.

If DISHTV expires at 80 level then both the calls would expire worthless, resulting in loss of the debit paid of Rs 7000 as the net cost to initiate Stock Repair strategy is Rs 1 per lot. Had Mr A doubled his position at 90 level then he would have lost Rs 70,000 (10*7000). This shows he is much better off by applying this strategy.

If DISHTV expires at 100 level then this would be the best case scenario where maximum profit will be achieved. May 90 call bought would result in to profit of Rs 5 where as May 100 call sold will expire worthless resulting in to gain of Rs 4. Net gain would be Rs 63,000 (9*7000).

Followings are the two scenarios assuming Mr A has implemented the Stock Repair strategy whereas Mr B has doubled his position at lower level. For the ease of understanding, we did not take in to account commission charges.

Stock Repair

Normal Averaging

DISHTV expires at Payoff from stock holding at Rs 100 Payoff from Repair Strategy Net payoff of Mr. A Payoff from stock holding at Rs 100 Doubling down position payoff Net Payoff of Mr. B

70

(2,10,000) 7,000 (2,17,000) (2,10,000) (1,40,000) (3,50,000)

80

(1,40,000) 7,000 (1,47,000) (1,40,000) (70,000) (2,10,000)

90

(70,000) 7,000 (77,000) (70,000) 0 (70,000)

100

0 63,000 63,000 0 70,000 70,000

110

70,000 (7,000) 63,000 70,000 1,40,000 2,10,000

Comparison:

Mr. A initiated stock repair strategy Mr. B Doubled his position at lower level
Margin Only margin money is required to initiate stock repair strategy Full amount has to be paid in cash for taking delivery of stock
Interest Loss (1 month) 1,50,000*0.08/12=1000 630000*0.08/12= 4200
Risk Risk associated is limited It involves high risk when the stock price falls
Brokerage Brokerage 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 suitable for an investor who is holding a losing stock and wants to reduce breakeven at very little or no cost. This strategy helps in minimizing the loss at very low cost as compared to "Doubling Down" of position.

Have Referral Code?

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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What is Stock Repair strategy?

Nilesh Jain

30 May 2017

New Page 1

As the name suggests, the Stock Repair strategy is an alternative strategy to recover from loss that a stock has suffered due to fall in price. The Stock Repair strategy helps in recovering losses with just a moderate rise in the price of the underlying stock.

Why to Initiate Stock Repair strategy?

Stock Repair strategy is initiated to recover from the losses and exit from loss making position at breakeven of the underlying stock.

Who can initiate Stock Repair strategy?

A Stock Repair strategy should be implemented by investors who are looking forward to average their position by buying additional stocks in cash when the underlying stock price is falling. Instead of buying additional stock in cash one can apply stock repair strategy.

Stock Repair strategy?

A Stock Repair strategy should be initiated only when the stock that you are holding in your portfolio has corrected by 10-20% and only if you think that the underlying stock will rise moderately in near term.

How to Construct the Stock Repair strategy?

  • Buy 1 ATM call
  • Sell 2 OTM calls

Stock Repair strategy is implemented by buying one At-the-Money (ATM) call option and simultaneously selling two Out-the-Money (OTM) call options strikes, which should be closest to the initial buying price of the same underlying stock with the same expiry.

Strategy Long Stock, Buy 1 ATM Call and Sell 2 OTM Call
Market Outlook Mildly Bullish
Motive Recover loss with limited risk
Break even (Strike price of buy call + strike of sell call + net premium paid)/2
Risk Net premium paid, Drop in price of holding stock
Reward Average of difference between strike price-net premium paid
Margin required Yes

Let’s try to understand with an example:

DISHTV earlier Bought at Rs 100
Quantity bought 7000
DISHTV Current spot price (Rs) 90
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 even 95.5
Lot Size 7000
Net Premium paid (Rs) 1

For example, an investor Mr. A had bought 7000 shares of DISHTV at Rs 100 in April but the price of DISHTV has declined to Rs 90, resulting in to notional loss of Rs 70,000. Mr. A thinks that price will rise from this level so rather than doubling the quantity at current price, here he can initiate the Stock Repair strategy. This can be initiated by buying one May 90 call for Rs 5 and selling two May 100 call for Rs 2 each. The net debit paid to enter this spread is Rs 1 amounting to Rs 7000, which will be the maximum loss from repair strategy that Mr. A will face if DISHTV falls below Rs 90.

If DISHTV expires at 80 level then both the calls would expire worthless, resulting in loss of the debit paid of Rs 7000 as the net cost to initiate Stock Repair strategy is Rs 1 per lot. Had Mr A doubled his position at 90 level then he would have lost Rs 70,000 (10*7000). This shows he is much better off by applying this strategy.

If DISHTV expires at 100 level then this would be the best case scenario where maximum profit will be achieved. May 90 call bought would result in to profit of Rs 5 where as May 100 call sold will expire worthless resulting in to gain of Rs 4. Net gain would be Rs 63,000 (9*7000).

Followings are the two scenarios assuming Mr A has implemented the Stock Repair strategy whereas Mr B has doubled his position at lower level. For the ease of understanding, we did not take in to account commission charges.

Stock Repair

Normal Averaging

DISHTV expires at Payoff from stock holding at Rs 100 Payoff from Repair Strategy Net payoff of Mr. A Payoff from stock holding at Rs 100 Doubling down position payoff Net Payoff of Mr. B

70

(2,10,000) 7,000 (2,17,000) (2,10,000) (1,40,000) (3,50,000)

80

(1,40,000) 7,000 (1,47,000) (1,40,000) (70,000) (2,10,000)

90

(70,000) 7,000 (77,000) (70,000) 0 (70,000)

100

0 63,000 63,000 0 70,000 70,000

110

70,000 (7,000) 63,000 70,000 1,40,000 2,10,000

Comparison:

Mr. A initiated stock repair strategy Mr. B Doubled his position at lower level
Margin Only margin money is required to initiate stock repair strategy Full amount has to be paid in cash for taking delivery of stock
Interest Loss (1 month) 1,50,000*0.08/12=1000 630000*0.08/12= 4200
Risk Risk associated is limited It involves high risk when the stock price falls
Brokerage Brokerage 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 suitable for an investor who is holding a losing stock and wants to reduce breakeven at very little or no cost. This strategy helps in minimizing the loss at very low cost as compared to "Doubling Down" of position.

Have Referral Code?