I was sitting in my home office the other day reviewing my portfolio. I was contemplating my current positions and feeling generally lackluster about a few stocks when I started to hear this repetitive bouncing noise from the street. My neighbor's nine-year-old son, Billy, was sitting outside playing basketball. I watched the ball intently; up, down. Up, down. Up, down. The ball eventually bounced wrong on a downtrend and rolled down the street, little Billy running after it as fast as he could. I smiled to myself at the whims of youth, and then turned my attention back to my portfolio.
Up, down. Up, down. Up, down. Then rolling down and away all the way to the other end of the street. I had an image of myself desperately chasing after money and investments down the road as they were bouncing away from me. I selected a few stocks that have recently seemed to get away from me and wondered how I could repair these broken stocks that had dropped so much.
Wait, How do you repair a broken stock?
Well, it's easier then chasing a bouncing basketball through traffic, if you have the right tools at your disposal. One such tool is the PowerOptions Long Stock Repair Tool.
Okay, so how does the Long Stock Repair Tool work?
First of all, this strategy will not work for all stocks all the time. If the stock has dropped too far from your original purchase price, any repairs might not be available for the next couple of months although repair opportunities might exist using LEAP options. The stock might have dropped so far that no repairs can be calculated for it. This tool works best if you feel the stock has reached a short term support and will be moving up in the near future.
Let's look at a fictitious example that can be calculated. Let's say there is a certain fictional stock, symbol XYZ (the elves and fairies magic wand making corporation). Less than a month ago you purchased 1000 shares of XYZ for $37.50. Over the past week the elves and fairies went on strike because of terrible working conditions (no pixie dust in the cafeteria, no comfortable mushroom chairs, etc.). The stock is now down to about $33.00 but you have a feeling that the strike might be ending soon. But, you have already lost $4.50 on the stock and although you feel the stock is going to go back up, you are unsure if it is going to reach $37.50 anytime soon. It may be possible to use options as a leveraged buy to lower your break even point on the stock. So, how can we find strategies to repair this position?
Simple. Just Logon to PowerOptions and click the "Stock Repair Strategy Tool" from the tools menu. At the prompt enter your underlying stock symbol (in this case XYZ), your cost per share (in this case, 37.50) and your number of shares (in this case, 1000). The Stock Repair Strategy Tool will now calculate possible repairs for you. After you enter your information two repair tables will appear on the screen. One will be for the calculated credit repairs available for your stock; the other is for the debit repairs available. If no credit or debit repairs could be calculated for the stock, then neither one of the tables will appear.
The first column that appears in the table is the "the Target Month For Repair" section. This tells us that in this case, the only months that credit repairs can be calculated for is July and the January 2014 LEAPS. The second column, "Lowest Stock Cost" is the lowest price the stock can be at in order for the repair to work. Typically, the Lowest Stock Cost is the current market price at the time you entered the stock information into the tool. The third section is the "Highest Stock Cost." This is the highest price the stock can be at for the repair to work. If the stock price goes above the Highest Stock Cost or below the Lower Stock Cost, the repair will not work. The next two columns list the strike price of the buy option and the sell option. These are the options in the target month that would allow you to repair the declining stock.
The Net Credit column is the difference between the options sold and the options bought. The break even is the stock price at which the combination of the stock and option strategy will have a zero net loss and a zero net gain. In this example, the repair strategy has lowered the break even down to $34.85 or $33.00. Now the stock does not have to go all the way back up to $37.50 for you to break even. If there is an "N/A" symbol in the break even or the Trade Details section, it means that the Highest Stock Cost for the repair to work is lower than the initial price you paid for the stock.
Deciding Between Debit and Credit Repairs
A credit repair will put money in your pocket as soon as the options are traded, this immediately lowers your break even and gives you some cash to play with or have around to collect interest. The downside is that the total return on the credit repairs will not be as profitable. The debit repairs will cost you some cash to trade, however, if you are right about the stock rebounding, then the potential return will be better.
In order to view the specifics of a possible repair strategy, just click the [Repair Details] button in the Trade Details column. Once you click that button the page will reload and a new table will appear. The top portion of the new table will show you the cost of your original investment, the current value of your position and the amount of loss you have sustained.
The second part of the detail section will show you the option symbols to be used for the repair, the strike prices and their bid prices, the price for the total repair transaction, the calculated Net Credit (or Net Debit), and the adjusted break even price for the position.
The next section of the detail page will run you through the breakdown of the value of your position through a range of stock prices. It will calculate the Stock Profit or Loss at each stock price, the Value of the bought call, the Net Credit (or Debit), the Total Profit or loss on your position, the Value of your strategy at expiration and the theoretical percent probability that the stock will be at or above that price at expiration. The break even price will be highlighted in blue.
The final portion of this details page is a breakdown of what your position will be if the stock is above the highest strike price, the position if the stock is between the two strike prices for the repair, and your position if the stock price is at or below the lowest strike price for the repair.
Each possible scenario for the range of the stock price is analyzed for you. You can see exactly what the risks, the probability and the rewards are for each repair strategy that has been calculated. You can now make a more confident move in repairing your broken stock, that is unless you would rather sit around and wait to see if your declining stock will ever make it all the way back to your original investment cost. Of course, you could just sell the stock and accept the loss, if you wanted to.
As with little Billy's basketball every up has a down, every action has a reaction. Once in a while the pattern is broken and the ball gets away and someone has to chase after it. The Stock Repair Strategy Tool can not prevent your stocks from getting away from you, nor does it work for every stock every time, but it just might make that chase after the ball a little less stressful and a lot more rewarding. Below are the Step-by-step instructions on how to log on to the Stock Repair Strategy Tool.
Step-By-Step Procedure - Repairing Broken Stocks
In some cases when a stock drops in value you might be able to get back to break even on the investment using a strategy called a Long Stock Repair. This works best when you feel the stock may be headed up.
For the Long Stock Repair, you sell calls equal to two times the number of shares of stock you own and cover the additional calls by buying calls at a lower strike price. You receive extra cash now and if the stock goes up your bought calls gain value. Follow the steps below to determine if a repair exists for your stock:
1) If you have not done so yet, go to http://www.poweropt.com/logon.asp.
2) Enter your User ID and password then click the [Log On] button.
3) When the MY HOME page appears, enter your stock symbol into the"Symbol:" box in the upper right corner, then click "quotes".
4) When the stock details page appears, click the "Stock Repair Strategy Tool" link below the company name. You will also have to enter the price you paid for the stock and the number of shares that you own.
5) A Table will appear showing the possible target months for the repair and stock price ranges. Locate the stock price range that matches what you paid for the stock. If your cost does not fit within any of the ranges shown there may not be a repair available for your stock. You may use a higher stock cost to try and recover at least some of your losses.
6) Next to the stock symbol you entered earlier, enter your cost per share for the stock (what you originally paid for the stock) and the number of shares you own. Then click the [SUBMIT] button again.
7) If a potentially profitable stock repair exists the tables will be updated and [Repair Details] buttons will appear for the months that repairs are possible. Click the [Repair Details] button for the desired target month.
In general, earlier repair months will have a lower net credit. That's the money you get to put in your pocket right now.
8) The detailed trades to Repair your stock will appear along with information on the new break even stock price and the net credit you will receive for the trade.