Covered option. Covered option financial definition of Covered option
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Covered Option A situation in which an investor writes an option while covered option an equal and opposite position on the underlying asset. A covered call option occurs when the investor owns the underlying asset and writes a call so that the underlying is on hand to sell to the option holder if the option is exercised.
A covered put option occurs when the investor writes a put and has enough cash to cover the strike if the put is exercised. It is thought that utilizing covered options is a beneficial tactic, as the investor may profit from the option premium.
Writers of covered calls typically forecast that the stock price will not fall below the break-even point before expiration. Strategy discussion Investors typically sell covered calls for one of three reasons: Income-oriented investors use covered option calls with the goal of enhancing cash returns. In return for the call premium received, which increases income in neutral markets, the investor accepts a limit on upside profit potential. Whether the shares are purchased at the same time a covered call is sold or purchased previously, the investor should believe that the stock price will trade in a neutral-to-bullish range during the life of the call.
Farlex Financial Dictionary. All Rights Reserved Covered option. When you sell call options on stock that you own, they are covered options.
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That means if the option holder exercises the option, you can deliver your stock to meet your obligation if you are assigned to complete the transaction. Similarly, if you sell put options on stock and covered option enough cash on hand make the required purchase if the option holder exercises, the options are covered. Covered puts are also known as cash-secured puts.
One appeal of selling a covered call is that you collect the premium but don't risk potentially large losses. Otherwise, you may have to buy the stock at a higher market price in order to meet your obligation to deliver stock at the strike price if the option is exercised.
The downside is that if your stock is called away from you, you'll no longer be in a position to profit from any potential dividends or increases in price.
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