Hi all,An options strategy covered in the ASX Booklet "Options:...

Hi all,

An options strategy covered in the ASX Booklet "Options: Understanding Options Strategies" is the Stock Repair Strategy.

Requirements for CML:
A mildly bullish forecast.
At least 1,000 shares that you are prepared to sell. Say, bought at $7.00.
One bought call option at-the-money per 1,000 shares held. Say Nov 6.00 Calls at 16c.
Two sold call options out-of-the-money per 1,000 shares held. Say Nov 6.50 Calls at 4c.

In exchange for having a ceiling to the maximum profit from the strategy, there is an upward kink in the payoff diagram... it speeds the profit (or less of a loss) up to the profit limit. There is no downside protection on the physical-holding side, but there is no exposure to theoretically unlimited risk on the written calls.

There is an ex-dividend date between now and expiry which could upset things a little if the sold calls go deep in the money (CML above $7.25) and are exercised. Disregarding this...

Total Cost:
Bought 1,000 CML @ $7.00 = -$7,000
Buy one Nov 6.00 Call @ 16c = -$160
Sell two Nov 6.50 Calls @ 4c = +$80
Total Cost = -$7,080

If at expiry CML is $6.25:
Loss on 1,000 CML = -$750
Dividend = +$120
Profit on Nov 6.00 Call = (25c - 16c) * 1,000 = +$90
Profit on Nov 6.50 Calls = +$80
Total Loss = -$460

... compared to a loss of (-$750 + $120) = -$630 without the strategy.

You are $170 better off with the strategy in place.

If at expiry CML is $6.50:
Loss on 1,000 CML = -$500
Dividend = +$120
Profit on Nov 6.00 Call = (50c - 16c) * 1,000 = +$340
Profit on Nov 6.50 Calls = +$80
Total Profit = +$40

... compared to a loss of (-$500 + $120) = -$380 without the strategy.

You are $420 better off with the strategy in place.

If CML exceeds $6.50, the sold calls could be exercised... for one of the options, the shareholding of 1,000 CML could be sold at $6.50 each. The other written option would need to be closed out.

The maximum profit is $40.

GK