Me&Go

Option
Adjustment
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Me&Go Option Adujstment school

LONG CALL REPAIR STRATERGY PART-1

(WHEN STOCK MOVES LOWER-YOU THINKS IT WILL GO UP)

Assume that after you purchase a long call, the underlying stock moves lower. When the
underlying stock moves lower, you will most likely be more concerned with the ability of the
stock to move back higher, otherwise your long call will result in a loss. If you still think
underlying stock will you can lower your breakeven point, and in most cases, you can do it at no
cost. Therefore, you can repair your losing position and give it a chance for a profit if the stock
recovers somewhat.
EXAMPLE-1

With ABC at $45, assume that you purchased a 2-month $45 Call for $2.50.
INITIAL POSITION
Long one 45 strike Call at $2.5.00.
Let’s check payoff table and diagram.
Payoff Table of Long Call Strike 45
PRICE AT PROFIT
EXPIRY
30 -2.5
35 -2.5
40 -2.5
45 -2.5
47.5 0
50 2.5
55 7.5
60 12.5
Payoff Chart

LONG CALL STRIKE $45

12.5

PROFIT AT 7.5
EXPIRY

2.5

0 10 20 30 40 0 50 60 70

-2.5 -2.5 -2.5 -2.5 -2.5

PRICE
Me&Go Option Adujstment school

BRAKEVEN PRICE = STRIKE PRICE $45 + DEBIT PAID $2.50

= $47.50
A few weeks later, YHOO drops in price to $42.50 and your $45 Call is now worth $1.50.
YHOO will have to move all the way back to $47.50 for you to just break even on the trade. You
still feel YHOO will move back higher but most likely not all the way back above $47.50. Instead
of taking the loss and closing the position, you can lower your breakeven point by rolling down
into a bull call spread.
OPTION ADJUSTMENT
Assume that with a ABC at $42.50, a ABC $40 Call with the same expiration as your $45
Call is trading at $3.00. To roll down to a bull call spread, you sell two $45 Calls at $1.50 each for
a total credit of $3.00 and simultaneously purchase the $40 Call for $3.00 for no additional cost.
By selling two $45 Calls, you are closing your long $45 Call and opening another short $45 Call to
combine with the long $40 Call. The credit from selling the two calls covers the cost of the long
call and allows you to roll down into a lower strike bull call spread at no additional cost.
FINAL POSITION
Long one $45 strike Call and
Short one $40 strike Call,
Your new $40/$45 bull call spread has the same cost basis as your $45 call $2.50—because
rolling down cost you nothing.
Payoff Table of BULLCALL SPREAD $45/$40
PRICE AT PROFIT
EXPIRY
30 -2.5
35 -2.5
40 -2.5
42.5 0
45 2.5
50 2.5
55 2.5
60 2.5
Payoff Chart

BULL CALL SPREAD $40/$45

2.5 2.5 2.5 2.5

PROFIT AT
EXPIRY
0 10 20 30 40 0 50 60 70

-2.5 -2.5 -2.5 -2.5

PRICE
Me&Go Option Adujstment school

BRAKEVEN PRICE = LOWER STRIKE PRICE $40 + DEBIT PAID $2.50

= $42.50
ABC just has to move higher from its current price of $42.50 by expiration for you to
realize a profit. For example, if YHOO moves back to $45, you will have a profit of $2.50 for a
return of 100% as opposed to a loss of $2.50 on your original position.

EXAMPLE-2

With XYZ at $100, you bought a 2-month $100 Call for $5.00.

BRAKEVEN PRICE = STRIKE PRICE $100 + DEBIT PAID $5.00

= $105
Breakeven at $105.00. That's the price of the stock at which you won't lose money at
expiration
.
Payoff Chart

LONG CALL STRIKE $100

15

PROFIT AT
EXPIRY
5

80 90 100 0 110 120 130 140

-5

PRICE

A few days later, XYZ is trading at $97 and your $100 Call is now worth $3.00. XYZ now has
to move $8 to reach your breakeven point and there is less time to expiration. You feel that XYZ is
more likely to go up now, but not as much as 8 points anymore.
You decide to stay long, but lower your breakeven so chances are higher that you can make a
profit.
This is how it works:
Suppose that the $95 Call is worth $5.00 ($2 in the money plus $3 in time value). You can
exit your $100 Call by selling it for the $3.00 it is now worth, and sell another extra $100 Call for
Me&Go Option Adujstment school

$3.00 more. You are now net short one $100 strike Call. And you also purchase a $95 Call for
$5.00.
INITIAL POSITION
Long one 100 strike Call at $5.00 (This Call loses $2.00 and goes down to $3.00)
TRANSACTION
Sell two 100 strike Calls at $3.00 (Total credit $6.00)
Buy one 95 strike Call at $5.00
The whole transaction is executed for a net Credit of $1.00.
FINAL POSITION
Long one 95 strike Call and
Short one 100 strike Call,
This forms a Bull Call Spread position.
As a result, you are now playing a 95/100 Bull Call Spread.
Payoff Chart

BULL CALL SPREAD 95/100

6 6 6

PROFIT AT
EXPIRY
1
80 90 100 110 120 130 140

-5 -5
PRICE

BRAKEVEN PRICE = LOWER STRIKE PRICE $95 + DEBIT PAID $5 – CREDIT $1

= $99
You went from having an initial maximum risk of $500, breakeven point 105 adjusted to a
new position where your maximum risk is $400, breakeven point 99.
Obviously, the same technique can be applied with Puts in the event you trade a Put and
the stock goes against you by moving up. You can sell twice the number of Puts and by another
one at a higher strike price resulting in a Bear Put Spread. Where you improve your breakeven
point giving you higher chances of a profitable trade and at the same time your maximum risk is
reduced.
 • maheshteli1892@gmail.com

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