Downside Protection

Downside protection refers to the amount a stock can drop before the underlying position begins to lose money. For example, let's say one were to purchase XYZ stock for $10/share, and sell a covered call for $1. The covered call protects the long stock position 10%, which means the stock could drop 10% before losses in the long position occur.

Of course, the overall position would lose money with any downward movement in the stock, since the overall value starts at $11 ($10 worth of stock, $1 worth of premium). Downside protection doesn't refer to this loss, only loss on the stock itself.