The answer is using Options!
However, Options can be a double-edged sword.
Use it the right way, and you can turn a losing position into a winner.
But if you use it the wrong way, you can turn a losing position into an even bigger losing position!
So if you want to use Options the right way to turn your losing positions around…
Then you want to pay attention to this article because I will share with you 3 powerful Option strategies that will help you repair your stock position…
And help you turn it from a losing position into a winning one.
Let’s get started.
How Do You Repair A Losing Stock Position?
So what does repairing a stock mean?
Most of the time, repairing a stock means lowering the average cost of your stock.
And the way to lower the average cost of your stock is simply by buying more stock.
So let’s say, for example, you currently own 100 shares of stock at $20.
To lower the cost of your stock, you buy another 100 shares at $10.
By doing so, the average cost of your stock is now $15.
This is known as “averaging down”.
But averaging down can be dangerous and extremely risky if you don’t know what you’re doing!
So before you skip ahead to buy more shares of your stock, you want to read this whole article to the end first!
Before You Use The Stock Repair Strategy…
Now, before you decide to repair your stock, the most important thing to ask yourself is whether the stock is a fundamentally good stock.
If it’s a fundamentally good stock, then chances are that it will go up in the long run.
Thus it would be relatively safe to average down on your stock to repair it.
But if the stock is NOT a fundamentally good stock, then it’s better to just cut loss on your stock position than to average down!
That’s because a stock that is not fundamentally good may never recover!
So this is vitally important to understand before you decide to repair your stock!
Why Repair Your Stock?
Now, if you’ve ascertained that your stock is a fundamentally good stock, you might be wondering why you should be repairing your stock and adding more risk.
You might be thinking of just holding onto the stock and waiting until it comes back.
Now, while you certainly can hold onto the stock until it comes back up, there are a number of benefits to repairing your stocks.
Benefit #1: Increase your chance of breaking even on your stock.
If you’ve already decided that you want to get out of your stock position, instead of holding it till it breakeven, you can consider averaging down.
That’s because when averaging down, you will get a lower average price.
And it’s much easier to break even on a lower average price.
Benefit #2: Increase your profitability when above the average price.
When you average down, it also means that you now own more shares of the stock.
So if the stock goes above your average price, you would make more than you originally would.
For example, before you averaged down, you might be Long 100 shares at $50.
So if the stock goes above $50, you would be making $100 per $1 move (because you only have 100 shares).
But after averaging down and buying another 100 shares at $40, you now would now be Long 200 shares at an average price of $45.
That means if the stock goes above $45, you would now be making $200 per $1 move.
That’s double the profits!
Benefit #3: You get your stock a great deal.
If you had waited for the stock to drop to $50 before you bought it because you thought it was a good price…
Then you would love the stock even more if it dropped below $50.
So not only do you get the stock at a cheaper price than before, you’re now able to make more on the way up!
Now, while repairing your stocks can improve your probability of breaking even, and increase your profitability, it also increases your risk.
Therefore repairing your stock can be considered a double-edged sword.
That is why it’s vitally important to only repair stocks that are fundamentally good, and that you don’t mind owning for the long term.
Stock Repair Strategy Questions
Here are a few questions you want to ask yourself before you decide to repair your stocks:
“Has there been any fundamental changes in the stock?”
If the stock’s fundamentals have changed, then this is where you might consider NOT to repair the stock.
For example, Facebook (Ticker: META) has recently decided to invest heavily into the metaverse infrastructure.
Some people view this as a fundamental change in the company’s direction and may not like this change.
So if the company has changed its core business direction, then you may not want to repair that stock.
“Has your view on the stock changed?”
If your view on the stock has changed, then you may not want to repair the stock.
Instead, it might be better to reduce the size of your position, or simply close it all out.
That’s because if your view has changed, and you don’t think it’s worth holding the stock anymore…
Repairing the trade may only end up in a bigger losing position if the stock never recovers.
“Do you have enough funds left to allocate to the stock?”
Finally, the most important question to ask yourself is if you have enough funds left to repair the stock.
If you don’t have enough cash to buy at least 100 shares of the stock, then there’s no point averaging down.
That’s because if you use margin to buy the stock (borrowing money from the broker), you are being charged a margin interest on a daily basis.
And that can be quite hefty, especially if the stock doesn’t go up quickly!
Alright, now let’s get into the 3 Stock Repair Strategies starting with…
Stock Repair Strategy #1: Cash Secured Put
The Cash Secured Put is a fantastic way to repair your losing stock positions.
Basically, how the Cash Secured Put works is like this:
1) Sell a Put Option.
2) Receive a premium for selling the Put Option.
3) Wait until the Option’s expiration date.
4) If the stock is above the strike price at expiration, the Put Option expires and you simply sell another Put Option to collect more premium. Rinse and repeat!
5) – If the stock is below the strike price at expiration, then the Put Option is exercised and you are now the proud owner of 100 shares of the stock!
The beauty of this Options strategy is that each time the Cash Secured Put continues to expire worthless, you can sell another Put Option and collect lots of premium over and over again.
These premiums collected can help reduce the cost basis of your stock.
For example, let’s say you have bought 100 shares of a stock at $100.
Then you sold a total of 5 Cash Secured Puts collecting $1.00 in premium each.
That’s a total of $5.00 in premium collected.
That means the effective cost price of your stock is now $95!
And you can keep doing this until your Cash Secured Put gets exercised.
5 Steps to Repairing Your Stock With The Cash Secured Put
So here are 5 steps on how to use Cash Secured Puts to repair your stocks.
Step 1: Identify how much more capital you can allocate to repairing the stock.
You want to ensure that you have enough cash in your trading account to buy 100 shares of the stock when your Cash Secured Put gets assigned.
That’s because you don’t want to put yourself in a position where you’re not able to fulfill the obligation to buy 100 shares of the stock.
If you don’t have enough cash and you buy the stock on margin, if the stock continues to drop further, you could end up in a margin call.
This is where your broker will call you to top up more money into your trading account.
And if you can’t top up your trading account, your broker will liquidate your position at a loss.
So it’s vitally important to ensure you have the funds to buy 100 shares of the stock at the Cash Secured Put’s strike price.
Step 2: Identify the level(s) that you want to buy the stock at.
For example, if you’ve already bought 100 shares of the stock at $100, you may identify the next level you want to buy another 100 shares at is at $80.
And if you have enough funds, you can plan for the next level to be at $60, and so on and so forth.
This is identifying levels by a fixed dollar price interval.
Alternatively, you could identify levels by percentage.
For example, you might want to buy another 100 shares only if the stock drops to 50 percent from its high.
So if the high was $140, then 50 percent from that would be at $70.
Step 3: Look for Options with days-to-expiration (DTE) 30 – 45.
Next, you want to look for Options with DTE 30 – 45 because that’s when the rate of decay for the Cash Secured Put would really start increasing.
Since we are selling the Put Option, we want its value to decrease as quickly as possible to zero.
This way we can capture the full premium on the Cash Secured Put.
And time decay is at its highest is when the Option has less than DTE 45.
Step 4: Wait until the desired level is above 0.20 delta to sell the Cash Secured Put.
Just by looking at an Option’s delta, you will be able to know how near or far the strike price is from the current market price.
For example, a delta above 0.50 means the Cash Secured Put is In-The-Money (ITM).
That means the current stock price is below the Cash Secured Put.
A delta at 0.50 means the Cash Secured Put is At-The-Money (ATM).
That means the stock price is currently where the Cash Secured Put is.
And a delta below 0.50 means the Cash Secured Put is Out-of-The-Money (OTM).
That means the stock price is currently above the Cash Secured Put.
Most of the time, as a stock repair strategy, we want to choose the strike prices that are OTM.
However, if you choose a strike price that is too far OTM, you may not be able to get much premium for selling the Put Option.
So if the strike price that you want to sell at is below 0.20 delta, then it might be better to just wait till the stock drops a little more before selling it.
As the stock price drops, the delta of the Put Options will increase.
Then once it becomes 0.20 delta or more, you can sell it for a decent premium.
Step 5: If Cash Secured Put expires worthless, sell another one.
Finally, if the Cash Secured Put expires OTM, then all you have to do is sell another Cash Secured Put!
And you can keep doing this until you finally get assigned on the Cash Secured Put.
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