Stock Repair Strategy Explained

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Option Strategy Stock Repair Strategy – Stock Repair.

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  • TERM Fall ’14
  • TAGS $5, $0.50, Strike price
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  • Stocks in WSJ
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The ‘$5 Threshold’ Trading Strategy Explained

Stocks that trade below $5 are considered by Wall Street to be “penny stocks.” These oft-derided, decidedly risky equities are populated by both illiquid, unlisted, wildly speculative “lottery ticket” companies that trade over-the-counter, and reputable companies that are either just beginning to grow or have perhaps fallen on hard times.

Stocks that trade below $5 are considered so risky that institutional investors, including pensions and mutual funds, aren’t allowed to buy penny stocks and can even be required to sell securities that fall below the $5 mark. This double-edged sword cuts both ways, however, when an issue rises above $5 and institutions are allowed to buy.

This forms the basis of the $5 threshold trading strategy.

When stocks cross the $5 barrier in a bearish manner and institutions sell, the market is flooded with shares and the price is driven down. When a stock rises over that $5 threshold, institutions and hedge funds can, and sometimes do, load up on shares which in turn drives the price higher.

Two such penny stocks with the $5 threshold approaching are Federal National Mortgage Association (OTC: FNMA) and Federal Home Loan Mortgage Corporation (OTC: FMCC). These government sponsored enterprises (GSE) have received a spike in interest as president-elect Donald Trump’s administration is expected to explore privatizing them and an ongoing court case will decide the fate of the GSE’s profits.

Fannie Mae and Freddie Mac traded at $4.35 and $4.27 in Thursday’s session.

Options Trading Strategies

List of Top 6 Options Trading Strategies

  1. Long Call Options Trading Strategy
  2. Short Call Options Trading Strategy
  3. Long Put Options Trading Strategy
  4. Short Put Options Trading Strategy
  5. Long Straddle Options Trading Strategy
  6. Short Straddle Options Trading Strategy

Let us discuss each of them in detail –

#1 Long Call Options Trading Strategy

  • This is one of the option trading strategies for aggressive investors who are very bullish about a stock or an index.
  • Buying calls can be an excellent way to capture the upside potential with limited downside risk.
  • It is the most basic of all options trading strategies. It is comparatively an easy strategy to understand.
  • When you buy it means you are bullish on a stock or an index and you expect to rise in future.

Best time to Use: When you are very bullish on the stock or index.
Risk: Risk is limited to the Premium. (There is a maximum loss if market expires at or below the option strike price).
Reward: Reward is Unlimited
Breakeven: (Strike Price + Premium)

Let us now understand through this example how to fetch the data from the website and how to determine the Payoff schedule for Long Call Strategy.

How to download Options Data?

Step 1: Visit the stock exchange website

  1. Go to https://www.nseindia.com/.
  2. Select Equity Derivatives
  3. In the Search box put CNX Nifty
  4. The Current Nifty Index Price is given on the right-hand top corner. Note it down in your excel spreadsheet.
  5. Please note that in this example, we have taken NSE (National Stock Exchange, India). You may download a similar dataset for other international stock exchanges like NYSE, LSE, etc

Step 2: Find the Option Premium

The next step is to find the Premium. For this, you will have to select some of the data according to your requirements.

So In the case of the Long Put options trading strategy, we will select the following data.

  • Instrument Type:Index Options
  • Symbol: NIFTY
  • Expiry Date: Select the required expiry date.
  • Option Type: Call (For further examples we will select Put, for a Put option)
  • Strike Price: Select the required Strike Price. In this case, I have selected 7600.
  • Once all the information is selected you may click on Get Data. The premium price will be displayed then which you will require for further calculations.

Step 3: Populate the data set in Excel Spreadsheet

Once you have got the Current Nifty Index Price and the Premium data, you can proceed further to calculate your Input-output data as follows in an Excel Spreadsheet.

  • As you can see in the image above, we have filled the data for the Current Nifty index, Strike Price and Premium.
  • We then have calculated the Break-even point. Break-even point is nothing but the price that the stock must reach for the option buyers to avoid any loss if they exercise the option.
  • For Call Option, this is how we calculated the Break-even point:

Breakeven Point= Strike Price + Premium

Step 4: Create the Payoff Schedule

Next, we come to the Payoff schedule. This basically tells you how much profit you will make or how much will you lose at a specific Nifty index. Note that in case of options you are not obliged to exercise them and hence you are able to limit your loss to the amount of premium paid.

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