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Understanding LEAPS: Using the Most Effective Options Strategies for Maximum Advantage by Allaire

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CHAPTER 9Collars

Nobody but nobody will contest the value of owning protective puts; having the right to sell shares you own at a set price, thus limiting your risk and potential losses is a no-brainer. The problem investors have with protective puts is their cost, especially when LEAPS are involved. Take the following example:

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Although the concept of insuring AXP for the next 19 months sounds good in theory, when an investor has to pay $6.60 for the at-the-money puts, an amount that represents just over 16 percent of the stock price, we can understand why a lot of people decide to take their chances and forgo the downside protection. Combine ...

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