Stock Repair Strategy. How to Fix a Losing Stock Position. Facebook Repair Strategy
We have all done it, invested in a stock fully expecting it to go up and then something happens and the stock falls. Most knowledgeable readers of this blog will accept that stocks do not go up in a straight line and sometimes you just need to be patient. But there are times when you just need to sell the stock and get out.
I’m going to share with you in this blog how to fix a losing stock position and sometimes even getting out with a profit when selling at a lower price. This is called the stock repair strategy. And is one of the most powerful things you will learn.
The great thing about the stock repair strategy is that it can be cost neutral …. It may not cost you a cent and in some cases can generate an income.
Let me demonstrate with a Facebook Repair Strategy example …..
But before I do I just want you to know we have a full course which outlines step by step how to repair losing stock positions in our members area. You can Take a free trial and complete the course if you like.
Back to our example with FB.
Example with Meta (Facebook) FB:
Today Nov 15th 2021 Meta (Facebook) is trading at $347…. Imagine that you bought 100 shares of the FB stock at its high of $384. You are down 11.8% in your position.
New Lower Target Stock Price:
Let’s pretend that you have now changed your target price for the FB stock and decided that you would sell the stock if it got back to $365. This would still lead to a loss of 5% from the price you bought the stock at.
But is there any way you could reduce this loss or even turn it into a profit and sell at $365?
Doubling down on the stock is not a good idea:
Most Investors would simply add another 100 shares of FB and effectively reduce their average price in the stock. By purchasing another 100 shares at $347 … you will have brought your average purchase price from $384 to $365.
This would mean that you could exit at break even if the stock rises to $365.
But this is not a good idea…. What if you were wrong again and the stock falls further? You have just doubled up on the problem! For every $1 fall in the stock you are now losing $200 instead of $100
The good news is that you can create the same trade using Call Options without costing you. Here is how it works……
The Repair Strategy….. Part 1
A call option gives the owner the right but not the obligation to buy a stock at a predetermined price by an agreed date in the future.
An example would be the December 17th (31 days from now) $345 FB Call Option. If I buy one of these call options it gives me the right but not the obligation to buy another 100 shares of FB anytime between now and Dec 17th at $345. If the shares jump to $365 I still get to buy the shares at $345.
This effectively gives us control over 200 shares of stock… the 100 shares that we own plus the 100 shares we could buy at $345 if we wanted to. This is the equivalent of doubling up on our position without the cost of buying the stock outright.
The cost of this Call option is $14 per share.
The Repair strategy Part 2 ……
Part 1 of the repair strategy allows us to effectively double up on our position without the cost of buying another 100 shares. But there is still a cost to this of $1400 for the call option contract.
Part 2 of the strategy will neutralise this cost. We will now sell a Covered Call on the 200 shares we have control over for the December 17th $365 Call Options.
With this part of the trade we have obligated ourselves to sell the 200 shares we have control over at $365 by Dec 17th. We will receive a premium of $1400 for selling the two call option contracts … This neutralises the cost of buying the call option in part 1 of the repair strategy.
So what does it mean?
Scenario 1 …. Stock reaches our new target price of $365.
If the stock price of FB reaches $365 We will effectively buy another 100 shares of FB at $345 bringing our average price per share down to $364.50.
We will then sell those 200 shares at $365 for a profit of $0.50 per share or $100.
Now compare this to doing nothing …. We would have lost $1900 ($384-$365* 100 shares).
So if this scenario plays out we will have exited FB at a lower price than when we bought it and at a slight profit. The trade cost us nothing to put on! If we did nothing we would lose $1900 or 5%!
Scenario 2 …. Stock stays at $347.
If the stock price of FB remains at $347, we will effectively buy another 100 shares of FB at $345 bringing our average price per share down to $364.50.
We will still hold our 200 shares at $264.50 for a loss of $17.50 per share or $1750. A loss of 4.6%
Now compare this to doing nothing …. We would have lost $3700 ($384-$347* 100 shares). This is a 9.6% loss.
So if this scenario plays out we will still own FB at a lower price than when we bought it. We would still be losing but the losses have been cut dramatically to 4.6%. The trade cost us nothing to put on!
If we did nothing we would lose $3700 or 9.6%!
Some points to consider:
- You have nothing to lose when you establish a cost neutral repair strategy.
- The strategy is only as good as the new target price for the stock. If the target price is unrealistic then the strategy won’t work.
- Pick a realistic new target price and create the repair strategy around that.
We have a full course including step by step videos on the repair strategy in our stock market community. It is free to join. Click Here if you would like to join and access all of our courses for free.
Don’t bury your head in the sand ….
As I said at the beginning stocks do not go up in a straight line, sometimes they fall out of favour for whatever reason and it might be a good time to add more. But other times it is time to get out and cut your losses. Knowing how to exit and limit the damage can be the difference between a profitable portfolio and a loss making portfolio.
Be realistic in your assessment of your stocks. As human beings we never want to be wrong. We will always suffer from confirmation bias and seek information that proves us right. Taking early and decisive action is crucial when cutting losers from your portfolio.
If you have a losing stock position, we offer a FREE ’one to one’ mentoring session. We can talk you through your options. We will have a fresh perspective on the stock for you.
Click here if you would like to book a free mentoring session.
Summary
The stock repair strategy is an excellent way of exiting losing stock positions, sometimes with a profit. You don’t have to suffer huge losses. Speak to us now and see if we can help you.
Happ Investing
Stephen