A covered option is a financial transaction in which the holder of securities sells (or "writes") a type of financial options contract known as a " call" or a " put" against stock that they own or are shorting. The seller of a covered option receives compensation, or "premium", for this transaction, which can limit losses; however, the act of selling a covered option also limits their profit potential to the upside. One covered option is sold for every hundred shares the seller wishes to cover. [1] [2]
A covered option constructed with a call is called a "covered call", while one constructed with a put is a "covered put". [1] [2] This strategy is generally considered conservative because the seller of a covered option reduces both their risk and their return. [1]
Covered calls are bullish by nature, while covered puts are bearish. [1] [2] The payoff from selling a covered call is identical to selling a short naked put. [3] Both variants are a short implied volatility strategy. [4]
Covered calls can be sold at various levels of moneyness. Out-of-the-money covered calls have a higher potential for profit, but also protect against less risk, as compared to in-the-money covered calls. [1]
A covered option is a financial transaction in which the holder of securities sells (or "writes") a type of financial options contract known as a " call" or a " put" against stock that they own or are shorting. The seller of a covered option receives compensation, or "premium", for this transaction, which can limit losses; however, the act of selling a covered option also limits their profit potential to the upside. One covered option is sold for every hundred shares the seller wishes to cover. [1] [2]
A covered option constructed with a call is called a "covered call", while one constructed with a put is a "covered put". [1] [2] This strategy is generally considered conservative because the seller of a covered option reduces both their risk and their return. [1]
Covered calls are bullish by nature, while covered puts are bearish. [1] [2] The payoff from selling a covered call is identical to selling a short naked put. [3] Both variants are a short implied volatility strategy. [4]
Covered calls can be sold at various levels of moneyness. Out-of-the-money covered calls have a higher potential for profit, but also protect against less risk, as compared to in-the-money covered calls. [1]