UK Accounting Glossary
A covered option is either a put or a call option which is covered (backed) by sufficient shares of the underlying security. An option is a covered option if sufficient shares are already owned to “cover” the option if it is exercised. The opposite of a covered option is a naked option. The advantage of a covered option over a naked option is that a covered option has limited and defined risk, whereas a naked option has virtually unlimited risk. If a call option is sold but is covered (or backed) by previously-purchased shares of the security, then the call option is a covered option. This type of covered option is referred to as “selling a covered call” and is considered a relatively safe play. Many investors routinely sell a covered option each time they purchase stock as a way of reducing the risk associated with owning the stock. While a covered option reduces risk, it also limits an investor’s potential profit on a transaction.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Covered Option are sourced/syndicated and enhanced from:
This glossary post was last updated: 4th February 2020.