covered put option

Covered Put Option

A situation in which an investor writes an option while holding 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.

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covered put option

A put option sold short by an investor who is short the underlying stock. If the put is later exercised, the investor will be required to purchase the underlying stock from the holder of the put. The stock will then be used to cover the short position in the stock.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.