When I told them about this cheeky little options strategy, they laughed at me – now they are paying attention, BIG time! So what do you do, if the share price goes down?

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So what do you do, if the share price goes down

So what do you do, if the share price goes down

More than any single question, this one comes up more often than not at virtually every presentation I do, in relation to covered calls.  The great thing is my answer is not what most people expect to hear!  Let me explain…

Which one of the three choices are you going to take?

Choice one – do nothing – sit back and watch the share price drop and hope it doesn’t fall too far!  After all, it’s about the long term, isn’t it?

Yes I agree – what a ridiculous choice to make and one which will cause you stress, potentially financial hardship, frustration and most importantly may well dent your confidence and mindset.

Sadly and all to often, this is exactly what most people do – they do nothing – paralysed by fear, and just cop it straight between the eye.  The rebuttal on watching this happen is usually something like “well the fundamentals are strong, so it will bounce back…”

Choice two – and one we advocate on all trades.  Have your stop loss in place to make sure if your view is wrong, your losses are manageable and you can bounce back.  This requires some discipline and is critical to long term trading success.  Think about it, if you lose 5% you need to make around 5 1/2 % to get back to square.  What’s more, mentally, it is fairly easy to deal with – not too big – manageable, and of course you can get back in the saddle for the next trade anyway.  However, if you make a 20% loss, you need to make25% just to get back to square.  Which is most likely??  What’s more that will probably hurt, dent your confidence and you may sit out a few trades – more than likely the ones that would have you back to square.  Sounds familiar, right?

Choice three – a strategy with a difference!  When I introduced the stock repair options strategy, I got laughed at.  Don’t be stupid, sounds all a bit fanciful and sure, whatever! were just some of the positive comments I heard.

I felt like an alchemist, trying to make gold right in front of their disbelieving eyes – Here’s the thing, you just can’t help everybody – they need to at least be open minded!

Bought QBE Insurance Group Ltd (ASX: QBE) at $11.36 and sold it for $11.84 and made a profit of 60c

Yes you did read that headline correctly and no my maths skills haven’t gone out the door!  Now of course past performance is no guarantee, and trading involves risk and may not be suitable for you.  That said, is just holding shares with great fundamentals – CBA, NAB, ANZ, WBC, BHP or RIO to name a few, even more risky, especially watching their prices get shredded over the past month or so?

This is precisely what we did with clients trading QBE Insurance Group Ltd (ASX: QBE) over the past 2months.  So this is not a concept or some funny business on a white board, this is real, cold hard facts – and now cash in the bank.

If a share price falls and you are happy to continue holding the stock, with the expectation of a recovery (rather than simply blindly holding on) then this strategy may well be something that you could be using.

We bought QBE Insurance Group Ltd (ASX: QBE) at $11.36

The share price slipped down to $10.25

At this point, we elected to stock repair the trade.  That involves selling double the number of calls than stock you have to cover it.  Very dangerous as you have a naked sold position so to remove that risk, totally, the credit from selling the calls, will fund the purchase of the same amount of lower strike calls as you have stock.  Therefore, naked risk removed.  If by now you are confused, feel free to come along to one of our training workshops or have a chat with one of our traders and we can be guiding you through this and helping you do the same.

Enter Stock Repair Options Strategy

Currently hold 1000 QBE Insurance Group Ltd (ASX: QBE) purchased for $11.36 (at that point, trading at 10.25)

Sell 20 September 10.76 Call Options

Buy10 September 10.00 call options

The net effect of this helped bring down the break-even point on the trade, without averaging down on the stock itself.  In this instance, the stock rallied – it didn’t need to rally as it did, for us to exit for a profit.

This is an example of using options to help reduce risk on a position, providing the trader with greater flexibility and an enhanced outcome, without having to rely on a full recovery in the stock.  This is exactly what we just closed out, for a number of our clients this afternoon – real profit, in the bank!

The recent drops across the banks are providing an opportunity for this for shareholders.  Perhaps you would like some help with this, on your portfolio of shares.  And look, this is not a one off.  For example, I did this on my Fortescue Metals Group Limited (ASX: FMG) shares a while back.

You are probably thinking, why hasn’t my broker told me about this?  Probably because they don’t know how to do it, aren’t qualified to do it or are plain lazy.

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Originally from the UK, Andrew has been a market professional for almost 19 years, trading a wide range of global markets and instruments. As a highly regarded industry speaker, he has spoken alongside Sir Richard Branson, Robert Kiyosaki, Anthony Robbins and Tony Blair, empowering many thousands of people, from all over the world, with the skills, techniques and ...
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