Stocks & Commodities V. 30:5 (26): Explore Your Options by Tom Gentile

Stocks & Commodities V. 30:5 (26): Explore Your Options by Tom Gentile
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Explore Your Options by Tom Gentile


If a trader is long stock that goes against him and heís unwilling to sell, are there any option strategies to recoup those paper losses without laying out more capital?

Hypothetically, anything is possible. But itís also true when a trader opens up his portfolio to options, there are more opportunities to produce a larger profit or reclaim open losses faster. For a longer-term investor intent on holding shares despite an existing loss, one such strategy is called a double long position.

In an unprofitable long stock scenario, a double long consists of executing a ratio front spread as close to free or a credit as possible. Thatís easier done than said. The front spread looks to purchase a lower strike call, typically at-the-money call, while selling higher strike calls of the same contract month. The most popular ratio is 1 x (2). Without stock ownership, this strategy is net short calls above the higher strike, but thatís not necessarily a bad situation to be in, at first at least, as the maximum profit is also at the strike. The breakeven on a 1 x (2) is this profit added to the shorted strike call.

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