Explore Your Options by Tom Gentile
GETTING EVEN FOR FREE?
Can any option strategies help with an unrealized loss on a stock position without putting additional capital at risk?
Yes, there is. In this type of situation, a trader can apply a buy-write strategy where a call is sold one-for-one against the existing shares held. An offshoot of this strategy and perhaps a bit more clever is to execute a ratio front-spread in order to ratchet down the breakeven even further.
The combined position, which consists of +1 call x ‑2 higher strike calls against an existing position of +100 shares, works like owning two buy-writes at the sold strike if shares reverse course and rally higher. But if the stock continues to move lower, the trader maintains the risk associated with the originally held long stock as the spread will go out worthless at expiration.
Remember, due to the construction of our combined position, the trader owns one buy-write and one limited risk bull vertical spread. When the front-spread is executed for even money or a credit, the trader avoids the cost associated with averaging down with either stock or a long call.