Introduction: Fixing a Losing Position 📉
Welcome! This course teaches you the Stock Repair Strategy, a powerful options technique to help you recover losses on a stock that has fallen significantly. We'll use a real-world example involving QCOM to show how you can strategically lower your break-even price and exit a losing position with minimal new risk.
The Situation and Setting a New Target
The repair process begins by accepting that the stock's outlook has changed and setting a realistic, lower exit price.
The QCOM Scenario
Our investor bought 200 shares of QCOM in November 2015 at an average price of $56.28. This was the original cost basis.
By February 2016, the stock had dropped to $49.19—a loss of over 12%. The investor decides a full return to $56.28 is unlikely in the short term.
Original Goal: Exit at $65
New Target Exit Price: $52.50
The repair strategy must therefore find a way to make up the difference of $3.78 per share (or $756 total) on a bounce to $52.50.
The Repair Strategy: The 2:1 Ratio Call Spread
The Stock Repair Strategy uses a special options combination called a 2:1 Ratio Call Spread against the existing shares. This allows you to synthetically double your shares' performance between two chosen strike prices.
Executing the QCOM Trade
The investor selects call options with roughly 90 days remaining.
Buy (Long Call): 2 contracts of the $48.00 Strike Call, paying $3.69 per contract. Total paid: $$738.
Sell (Short Call): 4 contracts of the $52.50 Strike Call, receiving $1.66 per contract. Total received: $664.
This resulted in a minimal Net Debit of $74. This is the small cost to initiate the repair.
Rights and Obligations
The 2 long $48 calls give the investor the right to buy 200 more shares at $48.00.
The 4 short $52.50 calls create an obligation to sell a total of 400 shares at $52.50. This is covered by the 200 shares already owned plus the 200 shares from the long calls.
Profit and Loss Analysis: Repairing the Loss
The genius of the strategy lies in how the long call spread covers the loss on the stock.
Optimal Scenario: QCOM Rallies to $52.50
If QCOM is exactly $52.50 at expiration, the trade achieves its goal:
The Stock Loss (selling at $52.50 instead of $56.28) is -$756.
The Options Gain from the long $48 calls (now worth $4.50 each) is +$900.
The options gain offsets the stock loss, leaving a final Net Profit of $70 after accounting for the initial $74 debit.
The Result: The effective break-even price was lowered from $56.28 to approximately $52.13.
The Trade-Off: Capped Upside
Crucially, the upside profit is capped at the $52.50 short strike.
If QCOM rises to $55.00, the investor still only makes $70. The gain on the long stock above $52.50 is perfectly cancelled out by the loss incurred on the extra short calls.
Downside Risk
If QCOM continues to fall below the $48 strike, the options expire worthless. The investor loses the $74 debit, but the downside risk on the underlying stock position remains unchanged. The repair strategy does not increase the loss.
How to Manage and Exit the Trade
As expiration nears and the stock is above the $52.50 strike, the investor wants to lock in that maximum profit.
Exercise and Assignment (The Easiest Route): If the price is above $52.50 on expiration Friday, the brokerage will automatically handle the simultaneous exercise of the long $48 calls and the assignment of the short $52.50 calls. This is the simplest way to liquidate the entire 400-share position and capture the maximum profit, often with lower fees.
Liquidation: The investor can actively close out the option spread by buying back the short calls and selling the long calls, and then selling the stock at the market. This is generally less efficient due to multiple transactions and friction from the bid-ask spread.
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Summary and Practice
The Stock Repair Strategy provides a high-probability way to recover from a significant loss.
It requires only a minimal capital commitment (the debit).
It significantly lowers the necessary recovery point (from $56.28 to $52.13 in our QCOM example).
The cost is accepting that your profit is capped at the new, lower exit price.
Test Your Knowledge 1
CLICK HERE to take the quiz.
Test your knowledge 2
At this stage it is best if you start practicing for real so this is what we want you to do:
Pick any optionable stock
Imagine that you bought the shares 15% higher than what they are trading at today.
Pick a new target price below the purchase price
Prepare a repair strategy expiring 3 months from now (roughly)
Create Profit and Loss tables
Identify your breakeven
Identify your Max Profit
Compare what your profit would be with the repair strategy if new target price is reached vs not doing the repair strategy
Share your insights on our daily members web meetings
Review on Google
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