Covered option(redirected from Covered Options)
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When you sell call options on stock that you own, they are covered options. 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 have 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.