Of course, if it were that easy then everyone would do it. Unfortunately, the stock can go down, and this strategy offers little downside protection. Should the stock move below $23 by expiration, the trader will be the proud owner of an additional 100 shares, now making average cost $25. But the loss would still be the same -- between $27 and $23 -- since the trader owns 200 shares now rather than 100.
Traders who own more shares will then often turn to the above-mentioned repair strategies. In this way, they can at least look at either further lowering their break-even point in exchange for a ceiling on some shares, or consider collaring the newly acquired shares just to maintain some additional downside risk management.
When a trader uses this strategy, then proceeds to use the ratio call spread strategy, I actually don't see anything wrong with this if their thesis for the position remains valid. However, it does require patience, and often folks with a losing position lack this quality and become emotional. Generally, you need to have patience when you are applying a repair strategy or strategy of options to a position. Otherwise you are likely to abandon the trade within a few days of entry. Just be certain to understand the nuisances on any of these approaches before you jump in head-first.
At the time of original publication, Collins had no position in the stock mentioned.
Originally published on Friday, June 21 at 11:43 a.m. EDT. By Tim Collins REITs had a strong run up until mid-May. The wall was hit and since then most REITs have sacrificed their entire year-to-date gains, with some even being in the red. Still, there may be opportunity here. My focus is to look at more recent names to come into the REIT market. The following are six names that have been recently introduced or spun off. The list is actually diverse when I take into account there are only six names here. I don't have a favorite in the group, but understand there is risk, since these are newer issues or in a new model.