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Understanding Options 2E, 2nd Edition by Michael Sincere

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18

The Collar

As you know, the main risk when selling covered calls is that the underlying stock could fall in price. If you own a covered call position on a stock that plunges, the premium you received from selling the covered call will not offset much of your loss.

Fortunately, there is a strategy called a collar that can protect the value of underlying stock when you are selling covered calls. If, after selling a covered call, you believe that the underlying stock might tumble, and you want protection against a large loss, you can initiate a collar. Perhaps the stock has had a nice upward run, and using the collar strategy is one way to protect your gains. (Don’t forget that you can also sell the stock outright to lock in those gains.)

Creating ...

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