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    pkkothari
    1. An investor currently holds 1,000 shares of stock ABC that were purchased at $27.50 per share. ABC has since dropped to $22.20 per share. 2. To reduce his break-even point without investing more money or doubling his risk, the investor implements an options strategy. 3. The strategy involves buying 10 calls with a $22.50 strike price for $2.50 each and selling 20 calls with a $25 strike price for $1.30 each, collecting a net credit of $0.10. This allows the investor to potentially purchase additional shares at $22.50 to lower his average cost while capping his potential losses.

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    Repair

    Uploaded by

    pkkothari
    24 views1 page
    1. An investor currently holds 1,000 shares of stock ABC that were purchased at $27.50 per share. ABC has since dropped to $22.20 per share. 2. To reduce his break-even point without investing more money or doubling his risk, the investor implements an options strategy. 3. The strategy involves buying 10 calls with a $22.50 strike price for $2.50 each and selling 20 calls with a $25 strike price for $1.30 each, collecting a net credit of $0.10. This allows the investor to potentially purchase additional shares at $22.50 to lower his average cost while capping his potential losses.

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    1. An investor currently holds 1,000 shares of stock ABC that were purchased at $27.50 per share. ABC has since dropped to $22.20 per share. 2. To reduce his break-even point without investing more money or doubling his risk, the investor implements an options strategy. 3. The strategy involves buying 10 calls with a $22.50 strike price for $2.50 each and selling 20 calls with a $25 strike price for $1.30 each, collecting a net credit of $0.10. This allows the investor to potentially purchase additional shares at $22.50 to lower his average cost while capping his potential losses.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    24 views1 page

    Repair

    Uploaded by

    pkkothari
    1. An investor currently holds 1,000 shares of stock ABC that were purchased at $27.50 per share. ABC has since dropped to $22.20 per share. 2. To reduce his break-even point without investing more money or doubling his risk, the investor implements an options strategy. 3. The strategy involves buying 10 calls with a $22.50 strike price for $2.50 each and selling 20 calls with a $25 strike price for $1.30 each, collecting a net credit of $0.10. This allows the investor to potentially purchase additional shares at $22.50 to lower his average cost while capping his potential losses.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 1

    EQUITY OPTIONS STRATEGY

    Repair strategy
    SITUATION RESULTS
    An investor who has purchased a certain number of shares would sometimes • If the price of ABC stays unchanged or below $22.50, both series will expire
    face a situation where the price of his shares dropped due to a bear market or to worthless and the investor keeps the $0.10 premium collected.
    disappointing news issued by the company. The investor in this case can either • If ABC goes up to $24.00, the investor can recuperate $1.50 by selling the
    sell his shares at a loss and try to forget about his bad market experience, or he 22.50 calls at their intrinsic value. The ABC 25 calls will expire worthless.
    can try to reduce his average cost by doubling up his position. This strategy is
    • This strategy meets its objective if ABC goes up to $25.00. In this case,
    interesting if the investor thinks that the price of the shares may rise again in
    the investor will exercise his right to buy 1,000 shares of ABC at $22.50
    the future to reach at least his new break-even point. The investor’s objective has
    — reducing his average purchase price to $25.00. He would break even by
    actually changed. He is aware that he will not make a profit with the purchased
    selling 2,000 shares of ABC on the market.
    shares, but hopes at least to recuperate the amount invested in this purchase.
    However, doubling up a stock position requires investing more money, which • What if ABC goes up suddenly to $27.50? He can always exercise his right
    may not be available. Also, by doubling up his position, the investor is doubling to buy 1,000 shares at $22.50, but the investor is committed to selling his
    his downside risk with twice the number of shares. shares at $25.00. This strategy will not enable him to profit from a price
    increase above the break-even point.
    OBJECTIVE However, when ABC is at $27.50, the investor can still unwind this strategy with
    Reduce the break-even point without investing more funds and without doubling zero or close-to-zero cost by buying back the 20 ABC SEPT 25 calls at $2.50 and
    the downside risk. selling the 10 ABC SEPT 22.50 calls at $5.00 for a total cost of $0.00.
    STRATEGY
    An investor holds 1,000 shares of ABC for which he paid $27.50. ABC is now
    trading at $22.20. He thinks that the price of the stock may go up to $25.00,
    and that a good strategy would be to average down his break-even point from
    $27.50 to around $25.00. In order to do so, the investor has to buy 1,000 ABC
    shares at the actual market price of $22.20. This purchase needs the investment
    of $22,200.00, and by doubling his stock position he would be doubling his
    downside risk. He decides to do the following options strategy:
    • Buy 10 ABC SEPT 22.50 calls at $2.50
    • Sell 20 ABC SEPT 25 calls at $1.30
    • Net credit: $0.10
    Thus, the investor has purchased the right to double his position at $22.50, and
    he is committed to sell them $25.00, which is his new break-even point. The
    20 calls sold are covered by the ABC shares held in the portfolio and by the 10
    22.50-strike calls purchased in this strategy.

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