Stock Repair Stategy

If you have bought a stock and it has dropped in value but think it may make up some of it’s gain, here is a strategy that you can use.  I’ve successfully used it in the past and you should put in your arsenal of trading techniques.

The Stock Repair Strategy

It’s been a rough ride for a lot of investors. Formerly solid bellwether stocks like General Electric (GE) and Citigroup (C) have taken a beating. Some investors are waiting (patiently) for the market to turn around. Some traders are buying at the new, cheaper prices. But as experienced investors know, the market can always go lower, sometimes fast and furiously. There is one more alternative that can make sense in some cases: the stock repair strategy.

Introduction to the Stock Repair Strategy
The stock repair strategy is a strategy involving only calls that can be implemented when an investor thinks a stock will retrace part of a recent drop in share price within a short period of time (usually two to three months).

The stock repair strategy works best after a decline of 20 to 25 percent of the value of an asset. The goal is to “double up” on potential upside gains with little or no cost if the security retraces about half of its loss by the option’s expiration.

Benefits
There are three benefits the stock repair strategy trader hopes to gain. First, little or no additional downside risk is acquired. This is not to say the trader can’t lose money. The original shares are still held. So if the stock continues lower, the trader will increase his loses. This strategy is only practical when traders feel the stock has “bottomed out”.

Second, the projected retracement is around 50 percent of the decline in stock price. A small gain may be marginally helpful. A large increase will help but have limited effect.

Third, the investor is willing to forego further upside appreciation over and above original investment. The goal here is to get back to even and be done with the trade.

Implementing the Stock Repair Strategy
Once a stock in an investor’s portfolio has lost 20 to 25 percent of the original purchase price, and the trader is anticipating a 50 percent retracement, the investor will buy one close-to-the-money call and sells two out-of-the-money calls whose strike price corresponds to the projected price point of the retracement. Both option series are in the same expiration month, which corresponds to the projected time horizon of the expected rally. The “one-by-two” call spread is ideally established “cash-neutral” meaning no debit or credit. (This is not always possible. More on this later). To better understand this strategy, let’s look at an example.

Example
An investor, buys 100 shares of XYZ stock at $80 a share. After a month of falling prices, XYZ trades down to $60 a share. The investor believes the stock will rebound, but not all the way back to his original purchase price of $80. He thinks there is a reasonable chance for the stock to retrace half of its loss (to about $70 a share) over the next two months.

The trader wants to make back his entire loss of $20. Furthermore, he wants to do it without increasing his downside risk by any more than the risk he already has (with the 100 shares already owned). The trader looks at the options with an expiration corresponding to his two-month outlook, in this case the September options

The trader buys 1 September 60 call at 6 and sells 2 September 70 calls at 3. The spread is established cash-neutral.

Bought    1 Sep 60 call at 6
Sold         2 Sep 70 call at 3 (x2)
                                         -0-

By combining these options with the 100 shares already owned, the trader creates a new position that gives double exposure between $60 and $70 to capture gains faster if his forecast is right. FIGURE 1 shows how the position functions if held until expiration.

(See Figure 1 above)

If the stock rises to $70 a share, the trader makes $20, which happens to be what he lost when the stock fell from $80 to $60. The trader would be able to regain the entire loss in a retracement of just half of the decline. With the stock above 60 at expiration, the 60-strike call could be exercised to become a long-stock position of 100 shares. That means, the trader would be long 200 shares when the stock is between $60 and $70 at expiration. Above $70, however, the two short 70-strike calls would be assigned, resulting in the 200 shares owned being sold at $70. Therefore, further upside gains are forfeited above and beyond $20.

But what if the trader is wrong? Instead of rising, say the stock continues lower and is trading below $60 a share at expiration. In this event, all the options in the spread expire and the trader is left with the original 100 shares. The further the stock declines, the more the trader can lose. But the option trade won’t contribute to additional losses. Only the original shares are at risk.

Benefits and Limitations of the Stock Repair Strategy
The stock repair strategy is an option strategy that is very specific in what it can (and can’t) accomplish. The investor considering this option strategy must be expecting a partial retracement and be willing to endure more losses if the underlying security continues to decline. Furthermore, the investor must accept limiting profit potential above the short strike if the stock moves higher than expected.

Some stocks that have experienced recent declines may be excellent candidates for the stock repair. For others, the stock repair strategy might not be appropriate. For example take a stock like Ford (F) or General Motors (GM). Most investors and pundits alike agree it’s unlikely these stocks will make big a comeback anytime soon. Others, like Cascade (CAE) would seemingly be a good potential candidate for those expecting a rebound; however there are no listed options available to trade on it.

You can buy Dan’s new book here, if you trade options, it’s worth owning for your library.

Free Speech?

David Foster posts:

Here’s Obama’s “media diversity czar,” Mark Lloyd:

It should be clear by now that my focus here is not freedom of speech or the press. This freedom is all too often an exaggeration. At the very least, blind references to freedom of speech or the press serve as a distraction from the critical examination of other communications policies.

[T]he purpose of free speech is warped to protect global corporations and block rules that would promote democratic governance.

(from his 2006 book)

Mr Lloyd has had some very positive things to say about Venezuelan thug Hugo Chavez and his approach to the media:

In Venezuela, with Chavez, is really an incredible revolution – a democratic revolution. To begin to put in place things that are going to have an impact on the people of Venezuela.

The property owners and the folks who then controlled the media in Venezuela rebelled – worked, frankly, with folks here in the U.S. government – worked to oust him. But he came back with another revolution, and then Chavez began to take very seriously the media in his country.

More here about what this “taking very seriously” is doing to destroy media independence in Venezuela.

(link via Ms Ellison)

Back here in the U.S…in defending the strident White House verbal assault on Fox News, Obama adviser Valerie Jarrett asserted that the administration was “speaking truth to power.” As PowerLine points out:

Can we be far from “newspeak”when the most powerful office in the world holds itself out as speaking truth to power when it criticizes a cable news network?

Either Jarrett is an air-head or the Obama administration is a serious threat to freedom. The answer is, some of both, I think.

JOHN adds: I agree that Jarrett’s claim is ridiculous, but I think it has a history. Isn’t it a time-honored tradition for socialist governments, both national and Marxist, to continue to campaign against the “powerful” on behalf of the dispossessed, long after they have assumed control and have shot, imprisoned or cowed the supposedly “powerful?” It seems to me that Jarrett, knowingly or not, was placing the administration in a Peronist or Castroite tradition.

In American academia, free speech has been under serious assault for a couple of decades–both from administration-sponsored “speech codes” and from the thuggish behavior of various student groups. It is unsurprising that this hostility toward free expression would eventually move out into the larger society, especially with the election of an administration heavily committed to “progressivism” of the type popular among leftist academics.

Speaking of thuggishness, CNN commentator Lou Dobbs says he has received weeks and weeks of threatening phone calls (because of his opposition to illegal immigration) and that a shot has actually been fired at his house. I’m afraid we’re going to be seeing a lot more of this kind of thing.

Vicki Truitt Challenger Giovanni Capriglione to Hold Local Meet and Greet

Giovanni is holding an open meet and greet all day Friday November 13 at 1205 South White Chapel Blvd in Southlake.  We recieved our first piece of mail from him this weekend, pretty slick piece.  With everything that’s been going on recently in my life, I am still am trying to find time to sit down with him to record a Podcast.  Hopefully things calm down a little and I will find the time in the next week or so. 

You can find out more about Giovanni and his campaign at his website.

What is even better, if you type Vicki Truitt into Google, my post on Giovanni shows up on the first page.  That single posting has been looked at over 1,000 times in the last few weeks so maybe some people are looking for a true conservative to represent us here in NE Tarrant County.  Remember what I posted a few days ago, incumbants will have a tough time in this election cycle.

UPDATE:  Giovanni emails to let us know that while he will be around all day to meet people, he is shooting for a 6:00pm time for a gathering of people.

Been a long week

Sorry for the lack of posting this week, but had a busy week.  Here are a few quick hits that crossed my mind this week:

The Fort Hood shooting was horrific and if you watch how the press (and our President) is reacting it will make your skin crawl.  They are doing everything, and I mean everything to downplay the fact this guy was a Muslim Fanatic on a Jihad.  I am afraid our country will be destroyed by a nuclear bomb before we finally wake up to the fact that there is a segment of the world’s population that want to destroy us.

Unemployment figures that were released yesterday show just how bad the economy really is.  With true unemployment at nearly 17.5%, it will be a long road back to normalcy.  My wife was laid off yet again a couple of weeks ago and has a few things working, but it is a tough job market out there.  Again, the press reports that Unemployment numbers look promising, as the rate of the increases are slowing, if this was happening during a Republican Administration they’d be crying bloody murder.

Yesterday was my 10th wedding anniversary and my wife and I made a trip to Austin to see AC/DC and hang out in town for a day.  I could move there, except for all the hippies….well, I could ignore them.  The downtown area really is the best in Texas.

The Yankees won…..and I still hate them.  With baseball season over, I guess I’ll start watching winter league games again on spanish language TV.  My wife always wonders if I need therapy in the winter when she walks in and there I am watching a game in Puerto Rico or somewhere with spanish broadcasters……maybe I do. 

 On a local note, the P&Z Meeting was cancelled for Monday, again due to lack of development applications.  Things don’t look much better in that regards either.  At my office we have been seeing a lot more work come out for bid than in months past, but it seems there is a lot of work bidding but a lot of it never gets built.  Construction pricing continues to fall as the competition for the work heats up, lots of companies that have to move money every month just to pay their bills.  I’m grateful that we owe nobody anything and can survive for a spell with no work, even though I cringe at the thought.  It may be coming though, as some in our business seem to be in essense writing checks to owners to do the work for them, and I won’t even go there (an explanation, they are bidding work for below cost).

Have a good weekend, boy is the weather perfect or what?

Vicente Padilla Shot Himself

There are just too many spiffy things I could say here, but as to not get myself in any trouble I will say one thing.  Does anybody know if Michael Young was in Nicaragua?

Los Angeles Dodgers right-hander Vicente Padilla was treated for a minor gunshot wound after a hunting accident in Nicaragua on Tuesday, his agent said, according to the Los Angeles Times.

 

Jeff Lewis/Icon SMIVicente Padilla’s agent says the right-hander was treated and released after sustaining a minor gunshot wound in a hunting accident.

 

Padilla’s agent, Adam Katz, said the pitcher was grazed in his right thigh by a bullet, sought treatment at a local hospital and was discharged after 30 to 40 minutes, the newspaper reported.

“He’s fine,” Katz said.

The Times said, according to media reports in Nicaragua, that Padilla was injured at a shooting range. At least two reports stated that Padilla, 32, was accidentally shot by a bodyguard who was attempting to fix Padilla’s gun.

Flu Shots in Keller

Well, not necessarily in Keller, but while watching the news about the lines for Flu Shots, I am reminded of this photo.  Remember that when the Government says they can fix health care.

The Spin Begins

From The Corner:

Jake Tapper Tweets: 

DNC already emailing around an analysis by rival network saying VA/NJ races say much more about those candidates than they do about POTUS

Charter Review Committee

From the Mayor’s weekly briefing:

Residents sought to serve on Charter Review Committee

The City is accepting applications from citizens interested in serving on a Charter Review Committee for the purpose of reviewing and recommending changes deemed appropriate to the City Charter. Applicants must be residents and qualified voters of the City of Keller, and are expected to attend frequent meetings during the City Charter review process. The City of Keller City Charter is the document that establishes the powers and political organization of your municipal government and can only be amended by public vote. Applications are available on the City Web site here or from the Office of the City Secretary at Town Hall. Applications must be received by 5 p.m. Wednesday, Nov. 4.

You have until tomorrow to apply.

More Proof Tim McCarver is a moron

Tim McCarver just stated that Cliff Lee is a different pitcher with the Phil’s than the Indians, my son texted me the following:

Cliff’s a different pitcher with the phils than the indians? Pretty sure he won the cy young award with 22 wins and an era of 2.30 last yr

Texas Vs. California

From The Power Line Blog:

Texas, increasingly, is the economic and intellectual leader of the U.S. During the last 18 months before the current recession took hold, while the country as a whole was still creating jobs, more than half of those jobs were created in a single state: Texas.

Texas has usurped the leadership position that, decades ago, belonged to California. Today California is in decline, likely irreversibly so. William Voegeli draws the sad but instructive comparison in the Los Angeles Times:

In America’s federal system, some states, such as California, offer residents a “package deal” that bundles numerous and ambitious public benefits with the high taxes needed to pay for them. Other states, such as Texas, offer packages combining modest benefits and low taxes. These alternatives, of course, define the basic argument between liberals and conservatives over what it means to get the size and scope of government right. …

California and Texas are not perfect representatives of the alternative deals, but they come close. Overall, the Census Bureau’s latest data show that state and local government expenditures for all purposes in 2005-06 were 46.8% higher in California than in Texas: $10,070 per person compared with $6,858. …

Confronted with a stark choice between government dominance and freedom, Americans are voting with their feet:

One way to assess how Americans feel about the different tax and benefit packages the states offer is by examining internal U.S. migration patterns. Between April 1, 2000, and June 30, 2007, an average of 3,247 more people moved out of California than into it every week, according to the Census Bureau. Over the same period, Texas had a net weekly population increase of 1,544 as a result of people moving in from other states. During these years, more generally, 16 of the 17 states with the lowest tax levels had positive “net internal migration,” in the Census Bureau’s language, while 14 of the 17 states with the highest taxes had negative net internal migration.

That’s not hard to understand. As Voegeli says, “All things being equal, everyone would rather pay low taxes than high ones.” So high-tax states like California have to be able to show that their taxes are somehow worth it:

Today’s public benefits fail that test, as urban scholar Joel Kotkin of NewGeography.com and Chapman University told the Los Angeles Times in March: “Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California. Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California’s government and the middle class is constantly being renegotiated to the disadvantage of the middle class.”

These judgments are not based on drive-by sociology. According to a report issued earlier this year by the consulting firm McKinsey & Co., Texas students “are, on average, one to two years of learning ahead of California students of the same age,” even though per-pupil expenditures on public school students are 12% higher in California. The details of the Census Bureau data show that Texas not only spends its citizens’ dollars more effectively than California but emphasizes priorities that are more broadly beneficial. Per capita spending on transportation was 5.9% lower in California, and highway expenditures in particular were 9.5% lower, a discovery both plausible and infuriating to any Los Angeles commuter losing the will to live while sitting in yet another freeway traffic jam.

But those higher taxes in California must be going somewhere. Why aren’t they benefiting those many thousands of citizens who are leaving the state for greener pastures?

In what respects, then, does California “excel”? California’s state and local government employees were the best compensated in America, according to the Census Bureau data for 2006. And the latest posting on the website of the California Foundation for Fiscal Responsibility shows 9,223 former civil servants and educators receiving pensions worth more than $100,000 a year from California’s public retirement funds. The “dues” paid by taxpayers in order to belong to Club California purchase benefits that, increasingly, are enjoyed by the staff instead of the members.

No doubt similar studies in other high tax states, like my home state of Minnesota, would show the same thing: taxpayers aren’t getting anything in particular for their money, likely less than citizens in other states, but public employees are doing very well indeed. This explains why public employees’ unions have become the Democratic Party’s most loyal supporters, while those who are not on the public employee gravy train increasingly are packing up their belongings and moving to lower-tax states like Texas.

The debate, really, is over. High-tax states don’t deliver a better lifestyle–not for taxpayers, anyway. One of these days, voters will figure out that the same thing holds true at the national level. Higher taxes may be OK if you’re a public employee; otherwise, they’re a dead loss.

SCOTT adds: See also Voegeli’s City Journal essay “The big-spending, high-taxing, lousy-services paradigm” and Voegeli’s related column “em>Time is on California’s side.”

I guess that is why I hear more often than not when somebody speaks at a public hearing at a P&Z Meeting the following phrase:  “I moved here from California XX years ago and moved to Keller because of it’s a) rural atmosphere; b) good schools ; c) some other item that is not California