Let’s look at an example utilizing a stock that’s been under a lot of pressure in recent months: Microsoft Corporation (NASDAQ: MSFT). Nothing is more frustrating than making a new stock buy and then witnessing the stock move in the wrong direction after completing the transaction. We may think of options for the ability to hasten the process of a falling stock’s recovery after it has been traded down. A stock repair strategy is what we are going to look at today, so let’s get right to it. The goal of this tactic is to enable the investor to lower the price at which they will break even on the deal without having to contribute any additional funds. The transaction does not come with any other risks to its downside.
A Declining Trend for Microsoft Stock
If a trader had the misfortune to acquire Microsoft Corporation (NASDAQ: MSFT) stock while trading at 280, they would currently be holding a hefty loss in their account. On Friday, the stock price ended the day at 244.74 dollars. If you were trading stocks, you would need the stock price to rise to 280 before you would be back to breaking even. However, by utilizing options, we can get the break-even price down to 260 without exposing ourselves to any further risk than what was already included in the transaction.
This approach is possible when taking it: Purchase a call for 1 February 245 at 21.60. Sell two calls on February 260 at 14.35.
Purchasing a call with a strike price of 245 will set you back $2,160, while selling two calls with a strike price of 265 will net you a credit of $2,870. The execution of the trade resulted in a credit of $710 to the trading account.
No Extra Danger Involved For Traders
There is no additional risk to the downside since the trade was executed for a credit. If Microsoft Corporation (NASDAQ: MSFT) stock continues to trade at a price lower than 245, the trader’s call options will expire worthlessly, but the trader will continue to own 100 shares of Microsoft. The price at which a business is profitable has also been brought down to 259 dollars.
The combined stock repair strategy will outperform the pure stock position if the stock ends up anywhere between 245 and 260. As a consequence of this trade-off, any potential profits beyond 260 will not be realized. You have learned today that the stock repair approach is excellent for an investor holding a losing stock and wants to get back to break even and get out. This is because the stock repair method allows the investor to sell their stock at a profit.
It can assist the investor in lowering their break-even price at little to no additional cost. There is no protection against other losses. Although the investor is not shielded against more losses by the plan, “doubling down” may not be a more appealing prospect than what is now being considered. When an investor employs the stock repair approach, they are giving up any possible gains that the stock may have in the future. Please remember that trading options involve risk and that investors stand to lose their entire initial investment.
This material about Microsoft Corporation (NASDAQ: MSFT) stock is provided solely for educational reasons and is not intended as a trading recommendation. Before making any investment decisions, you should always make sure you have done your research and talked to a financial professional.
Featured Image: DepositPhotos © Peshkova