The
writer (or
seller) of an
option contract who either
owns the
underlying asset (for a
call) or has sufficient
cash to
buy the underlying asset if need be (for a
put). That is, a call option gives the
holder (or
buyer) the right but not the obligation to buy the underlying asset for the stated
strike price. When the call is exercised, it poses little risk for the covered writer because he/she already owns the underlying asset and can simply sell it to the holder rather than needing to buy the asset at the current market price, which is usually higher than the strike price. Likewise, a put gives the holder the right but not the obligation to sell the underlying asset to the writer at the strike price. A covered writer is able to buy the underlying asset with no problem because he/she has the cash on hand. This eliminates the
risk that he/she will have to sell other securities, perhaps at a
loss, to raise the cash. See also:
Covered Option,
Uncovered Writer.