Discuss the difference and similarity between covered call writing and protective put.
Call writing and Protective puts:
"Call writing" refers to a strategy in options trading where an investor sells call options on security they already own, generating income from the premiums received.
"Protective put," involves purchasing put options on a security. This strategy acts as insurance to safeguard the investor against potential price declines in the underlying asset. If the security's price falls below the strike price of the put option, the investor can exercise the put and sell the asset at the higher strike price, limiting their losses.
When used together, call writing and protective puts form a risk management technique known as a "collar." The investor combines selling call options (call writing) to generate income and offset the cost of buying put options (protective puts) to protect against potential downside risk. This strategy is particularly popular among investors seeking to hedge their positions while still generating some income from their holdings.
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