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Investing Specialists

A Call for Added Protection

Although they don't overlay stocks like their put siblings, call options still can protect on the downside.

During the last two weeks, I have been writing about how one can protect gains earned. In both strategies I have discussed, we use put options as a form of financial insurance to cap our exposure to the downside. The problems with puts, you'll recall, is how expensive they are. In last week's column, we partially solved the problem of expensive put insurance by using a strategy called a collar. Unfortunately, even though collars make put protection less expensive, you will also recall that they limit one's upside.

In this week's column, I will discuss another way to protect your winnings, which overcomes many of the weaknesses of using protective puts and collars. As opposed to the previous strategies we mentioned, which overlaid stocks with protective put options, this strategy uses call options alone.

Those of you who have experience in options may raise an eyebrow at this--"How can one protect one's downside with a call option?! A call option gives an investor access to the upside of a stock, after all!" 

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