lets talk options as a repair strategy..
lets say one has 5k shares shorted...
and one believes that the stock is going to decline from here?
(that's why one sells short)
egqpv are the eggs puts for april 12.5's
aptil 17 is the expiry date.
one could write the 12 1/2 puts right now for 1 9/16 and sell them..
bid 1 3/8 1 5/8.. so 9/16 is below the ask.
one could write the puts, and have the stock put to hime, forcing himself to cover @ 12.5--
1.625x 5000 is $8125, so there is a $8000 cash gain for those that write the puts.
now if one shorted @ 9 average, one is roughly $15k out of the money.
one may be getting a margin call, etc..
the $8000 may reduce the margin call, and allow the shorter to hold his position,
if the stock goes up from 12.5... one can wait for the time to expire and hope that the stock close @ 12.5 on 4/17,
in which case he has used options to repair 60% of his paper loss.
lets say it goes to 12 flat.. he can wait till expiry day and buy those same contracts back for .25-.375 near the end of the day, maybe less.
so he gets a return of 1.375- 1.25 x 5000= $6875?-$6125?
(i am doing this in my head, sorry)
with minimum risk...
the seller of the covered puts,then can withstand a rise in price to 14.125 due to the added cash in his coffers from the sale..
a rise to that level does not hurt him, in fact he can short more there, with money that would have been needed for the margin call(playing dangerously)
or he can cover his short by rebuying the puts at a cheaper level.
the parameters for his losses are
$10.875 to $14.125, if price goes below 10.875 his "insurance policy"
had a "deductible" which is whatever amount below $10.875 it goes..
If it goes above $14.125 he gets hits the same way he would have had he not written the puts,
The only difference is that he can use the proceeds from the sale to buy further out of the money options to hedge against his insured short...
get it?
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