Downside Protection

Downside Protection

Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written call option. Alternatively, it may be expressed in terms of the distance the stock could fall before the total position becomes a loss (an amount equal to the option premium), or it can be expressed as percentage of the current stock price.

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Downside Protection

A position on a security that hedges risk such that it protects the holder from loss under most circumstances. One of the more common forms of downside protection is a covered option, in which one takes a long position on an option on a security that the investor already owns. This limits the loss that the investor could sustain on the security.

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downside protection

An investment position that seeks to reduce losses resulting from the decline of a stock or a fall in the overall market. For example, put options provide downside protection against a decline in the price of the underlying stock. Likewise, writing covered call options can provide partial downside protection against price declines.