{{Short description|Stock options trading strategy}} thumb|right|400px|Payoffs from a short put position, equivalent to that of a covered call thumb|right|400px|Payoffs from a short call position, equivalent to that of a covered put A '''covered option''' is a financial transaction in which the holder of securities sells (or "writes") a type of financial options contract known as a "call" or a "put" against stock that they own or are shorting. The seller of a covered option receives compensation, or "premium", for this transaction, which can limit losses; however, the act of selling a covered option also limits their profit potential to the upside. One covered option is sold for every hundred shares the seller wishes to cover.<ref name=":0">{{Cite book |last=MacMillan |first=Lawrence |title=Options as a strategic investment |publisher=New York Institute of Finance |year=2002 |isbn=978-0735202382 |edition=4th}}</ref><ref name=":1">{{Cite web |last=Butler |first=Mike |date=2 February 2016 |title=Trading Strategy Covered Put |url=https://www.tastytrade.com/shows/mike-and-his-whiteboard/episodes/trading-strategy-covered-put-02-02-2016 |access-date=10 April 2022 |website=Tastytrade |language=en}}</ref>
A covered option constructed with a call is called a "covered call", while one constructed with a put is a "covered put".<ref name=":0" /><ref name=":1" /> This strategy is generally considered conservative because the seller of a covered option reduces both their risk and their return.<ref name=":0" />
== Characteristics == Covered calls are bullish by nature, while covered puts are bearish.<ref name=":0" /><ref name=":1" /> The payoff from selling a covered call is identical to selling a short naked put.<ref>{{Cite book |last=Natenberg |first=Sheldon |title=Option volatility and pricing: advanced trading strategies and techniques |publisher=McGraw Hill |year=1994 |edition=1st |pages=260–263}}</ref> Both variants are a short implied volatility strategy.<ref>{{Cite web |last=Zeng |first=Kai |last2=Schultz |first2=Jim |date=29 September 2021 |title=Covered Calls & Poor Man's Covered Calls |url=https://www.tastytrade.com/shows/from-theory-to-practice/episodes/core-strategies-covered-calls-poor-mans-covered-calls-09-29-2021 |access-date=10 April 2022 |website=Tastytrade |language=en}}</ref>
Covered calls can be sold at various levels of moneyness. Out-of-the-money covered calls have a higher potential for profit, but also protect against less risk, as compared to in-the-money covered calls.<ref name=":0" />
==See also== * Protective option
==References== {{Reflist|30em}}
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{{Derivatives market}}
Category:Options (finance) Category:Technical analysis