Generate Income Trade Options

We all have heard horror stories about people who lost many $1000s in the stock market decline that followed the rally of the late 90’s. Most if them, had bought high technology sector stocks, many of which dropped by as much as 70%, with little or no chance ever reaching those highs again!
Traditionally, traders and investors would always check the viability of the company in question, and then they would just buy more of the same stock, after the drop. They did so in an effort to average down the total investment, and get more of a ‘cheaper’ price.
This can help recover part of the losses, but requires enormous finance and/or market volatility.
The problem with this strategy is that you still need a lot of money to recover your losses, imagine a stock that has sharply fallen from $100 to $20. And for the next few years it will trade in the range $17-$30. Suppose you had the misfortune to buy that stock right at the top, at $100. And you bought a total of 1000 shares, costing you $100,000. After the bubble has burst, you are only left with a stock that’s worth just $20,000! Attempting to recover an $80,000 loss from minor price moves of $5-$7 dollar points at a time, would require a lot more money and years. Even if you had another $100,000 available for this, a trade that goes from $20 to $25, makes you a mere $5. Actually is not too bad if you used all $100K and made $25K on every such move, but in reality you will not get this lucky, it may take as many as 5 years to find 4-5 consecutive opportunities to make that $5 move each time. And remember that one more mistake could set you back 2-5 more years!
We assume that it doesn’t make sense to risk another $100K to recover a loss of $80K, or that you simply cannot afford it. We also assume that the stock in question is a financially healthy stock that just happened to be severely overbought when you lost on it. The stock still has excellent intrinsic value and future prospects. We are being conservative as we are looking to recover all $80,000 in losses, from minor price moves that take place 80% of the time, in a trading range no wider than $17-$30. (The stock trades at $20 today) 

Using the 2/1 Ratio Spread, to get losses back
The most common, options trading technique for recovering losses from long stocks, is the use of a Ratio Spread. (Please refer to specific Ratio Spread article for detailed description)
The big advantage of implementing a Ratio Spread, is that it can be implemented for FREE.

 The idea is to buy an ITM Call, while offsetting the cost by writing 2 OTM Calls.
Here we are going to see a detailed example, with an actual ATM long Call, rather than a ITM one, this means a definitely free trade, or in some cases it may even pay a net premium.
Assume a trader who holds a losing stock position, he had bought 100 shares of ABC stock at $50, but now they fallen to $40. He is in a $1000 loss!
The trader now wants to implement a 2/1 Ratio Spread to recover this $1,000, without laying down any more of his money!
So he buys an one month term ATM Call with a strike price of 40 (costs $200), while also writing 2 OTM Calls with a strike price of 45 (he gets $100 for each, $200 total).
The net cost to the trader is only his commissions!
According to Ratio Spread, the breakeven points are 40 and 50. But 50 is also the breakeven point of the long stock position! The two positions together have a combined breakeven point of 45! That is $5 lower than the original 50 level of the long stock.
The trader has lowered his breakeven point without spending more than $10-$15 in trade commissions, and nothing else!

Now the trader is looking for a minor $5 rally at expiration, if it happens, he will make $500 and then repeat a new Ratio Spread at that level. Remember there’s no downside risk with this strategy, there’s only upside risk should the stock rally sharply, but in that case you just get rid of the 2 written Calls, you wait to see what happens or just do a new Ratio Spread at the higher level.
The trader had lost $1000, he can make back the loss by making just 2 ratio spreads making $500 each, or more spreads making less each, even if the stock remains a loser stuck in a tight range below $45-$47. 

Practical tips in implementing a Ratio Spreads

1. The first breakeven point, (lower) is the strike price of the long , ITM Call plus the net debit/credit the spread costs, in this case zero, so we have a lower breakeven point of $40.
2. The higher breakeven point is the strike price of the written OTM Calls, plus the maximum dollar points that the ITM long Call will make, up until the OTM written Calls become ITM, in this case it’s: 45 the strike price of the 2 OTM
3. Even though the Ratio Spread is supposed to be a vertical spread, there’s nothing stopping you experimenting with a diagonal spread, that is instead of buying an one month out ITM Call, buy a 2 month one, while writing 1month OTM Calls. Analyzetrade.com offers advanced trade simulation tools that will allow you to see crystal clear results, based on actual market data.

In the case of a severe loss, such as the $80,000 stock price drop example mentioned earlier, the trader should imagine that he has another $100,000 and work out a lower breakeven point with the objective to recover $5,000 - $10,000 at a time. That is every time he implements a Ratio Spreads. Except that he never has to use any real money, since he will make the Ratio Spread for almost free!

Statistically, the stocks that burst, take years to recover or don’t recover at all, and when you count the cost of inflation it doesn’t make sense to just wait for 10 years or risk another $100,000. In the example of the lost $80,000 the stock may remain in a tight range for 2 years, making many minor $5 moves. If the average 3 contract, 2/1 Ratio Spread makes a $300 profit, then increasing the size of the contract 20 fold would make an average of $6,000. Given 15 minor price moves over 2 years (remember the OTM Calls need one month to expire each time) the trader can make $90,000 in profits trading like this, even though his original long stock remains a loser and stays at $20!!!
It’s never too late to recover your losses from the tech bubble burst, you need to invest very little money and more of your time to succeed. And it all can be done if you use the right options tools and mentoring programs such as the ones offered at Analyzetrade.com 
Contrary to what public opinion would have you believe with their lame math calculations, you don’t need $100,000 to recover another $100,000 loss!