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Using Collar to Protect Covered calls

 

A risk in selling covered calls is that the price of the underlying stock may fall. When you sell the rights of your stock, you have no control over them. If after selling a covered call you fear that he price of the underlying will fall then you could initiate a collar.

 

According to Investopedia.com the collar option strategy is "the purchase of an out-of-the-money put option is what protects the underlying shares from a large downward move and locks in the profit. The price paid to buy the puts is lowered by amount of premium that is collect by selling the out of the money call. The ultimate goal of this position is that the underlying stock continues to rise until the written strike is reached."

 

 

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