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Beware The Drag Of Collar Strategies

It’s been well-documented that, in general, investors are risk-averse. This aversion to losses leads many investors to seek “tail protection” strategies. And the most direct way to obtain downside protection is to buy put options.

However, purchasing volatility insurance is expensive, because, historically, realized volatility has been well below the level of volatility implied in the price of options. In other words, there’s a volatility insurance premium.

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