Options Glossary

Description: Options Glossary, Covered, Cover,Covered Call,Call Option,Put Option,Uncovered Put Writing,Uncovered put option writing,Uncovered Option,Uncovered Call Writing,Uncovered call option writing,Straddle,Naked Uncovered option

Covered

A written option is considered to be covered if the writer also has an opposing market position on a share-for-share basis in the underlying security. That is, a short call is covered if the underlying stock is owned, and a short put is covered (for margin purposes) if the underlying stock is also short in the account. In addition, a short call is covered if the account is also long another call on the same security, with a striking price equal to or less than the striking price of the short call. A short put is covered if there is also a long put in the account with a striking price equal to or greater than the striking price of the short put.

See Also:

Cover: To close out an open position - to buy back as a closing transaction an option that was initially written. This term is used to describe the purchase of an option or stock to close out an existing short position for either a profit or loss.

Covered Call: An option strategy in which a call option is written against long stock on a share-for-share basis.

Call Option: An option giving the buyer the right to purchase an underlying security at a fixed price (strike price) and within a specific period of time (expiry date).

Put Option: An option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned. The put option buyer hopes the price of the shares will drop by a specific date w hile the put option seller (or writer) hopes that the price of the shares will rise, remain stable, or drop by an amount less than their profit on the premium by the specified date.

Uncovered Put Writing: A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

Uncovered put option writing: A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

Uncovered Option: Uncovered Option is also known as a naked option - a written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security. This is a much riskier strategy than a covered option.

Uncovered Call Writing: A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.

Uncovered call option writing: A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.

Straddle: The purchase or sale of an equivalent number of puts and calls on the underlying stock with the same exercise price and expiration date.

Naked Uncovered option: A short option position that is not fully collateralized if notification of assignment is received. A short call position is uncovered if the writer does not have a long stock or long call position. A short put position is uncovered if the writer is not short stock or long another put.

Covered Write: Writing a call against a long position in the underlying stock. This is used to realize additional return on the underlying stock or gain some element of protection (limited to the amount of the premium less transactions costs) from a decline in the value of that underlying stock.

Covered Straddle Write: The term used to describe the strategy in which an investor owns the underlying security and also writes a straddle on that security. This is not really a covered position.

Covered Put Write: A strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.

Covered Combination: A strategy in which one call and one put with the same expiration, but different strike prices, are written against each 100 shares of the underlying stock. Example: writing 1 XYZ May 60 call and writing 1 XYZ May 55 put, and buying 100 shares of XYZ stock. In actuality, this is not a fully 'covered' strategy because assignment on the short put would require purchase of additional stock.

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