Determining Strike Prices

The key to working with a stock repair plan is to figure out how the stock has to perform to actually make the repairs. You have to look at where the value of the stock might go in the near future. There is always a chance that the stock might decline in value even further, but it could also rise. This makes it all the more critical to see what strike prices you should establish for the long call and the two short calls. Here’s a strategy for how to determine the strike prices to use:

1. Review the total loss that you had on a stock. Let’s say that you invested $120 in a stock that fell to $100.
2. The call that you buy should always be at the current value. Therefore, the buy option will be at $100.
3. Take half of the loss on your stock investment and subtract it from the original value to see what the calls you write for sale will be worth.

Since you lost $20 on that investment, you will have to subtract $10 from $120 for a total of $110. This is where the two calls will trade. The best thing to happen here would be for you to get to the $110 value. At this point, you should make a profit from the option you bought and the premiums associated with the long option will be offset by the premiums from the short options that were not exercised.