Microsoft Stock Repair Strategy; Get Back To Break-Even

There is nothing worse than making a new stock purchase and then watching the stock swiftly move to the downside.

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Thankfully, we can use options to speed up the recovery process on a stock that has dropped. The strategy we will look at today is called a stock repair strategy.

The idea with this strategy is that the investor can reduce the break-even price without adding any more capital to the trade. There is no additional downside risk with the trade.

Let’s look at an example using a stock that has been under pressure in recent months — Microsoft (MSFT).

Microsoft Stock In Downtrend

Assuming a trader was unlucky enough to buy into Microsoft stock at 280, he or she would be sitting on a considerable loss. The stock closed at 244.74 on Friday.

As a stock trader, you would need the stock to recover to 280 to get back to break-even.

However, by using options, we can lower the break-even price to 260, without adding any extra risk to the trade.

Here’s how it can be done:

Buy 1 February 245 call at 21.60

Sell 2 February 260 calls at 14.35

Buying the 245 call costs $2,160 and selling two of the 265 calls receives a credit of $2,870. The net result for placing the trade is a $710 credit.

No Additional Risk For Traders

Because the trade is placed for a credit, there is no additional risk to the downside. If Microsoft stock stays below 245, the call options expire worthless, and the trader still owns the 100 shares of stock.

The break-even price has also been reduced to 259.

If the stock ends up between 245 and 260, the combined stock repair strategy will outperform the pure stock position. 

The trade-off is that any potential gains above 260 are lost. 

Today, you have learned that the stock repair strategy is ideal for an investor who is holding a losing stock who simply wants to get back to break-even and get out.

It can help the investor reduce their break-even price for little or no cost.

No Protection From Further Losses

The strategy does not protect the investor from further downside, but it may be a more attractive proposition than “doubling down.”

When using the stock repair strategy, the investor is giving up any potential upside on the stock.

Please remember that options are risky, and investors can lose 100% of their investment. 

This Microsoft stock article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ

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