Covered option

Short description: Stock options trading strategy

Payoffs from a short put position, equivalent to that of a covered call

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.[1][2]

A covered option constructed with a call is called a "covered call", while one constructed with a put is a "covered put".[1][2] This strategy is generally considered conservative because the seller of a covered option reduces both their risk and their return.[1]

## Contents

* 1 Characteristics
* 2 See also
* 3 References
* 4 Bibliography

## Characteristics

Covered calls are bullish by nature, while covered puts are bearish.[1][2] The payoff from selling a covered call is identical to selling a short naked put.[3] Both variants are a short implied volatility strategy.[4]

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.[1]

## See also

* Married put

## References

1. ↑ 1.0 1.1 1.2 1.3 1.4 MacMillan, Lawrence (2002). Options as a strategic investment (4th ed.). New York Institute of Finance. ISBN 978-0735202382.
2. ↑ 2.0 2.1 2.2 Butler, Mike (2 February 2016). "Trading Strategy Covered Put" (in en). https://www.tastytrade.com/shows/mike-and-his-whiteboard/episodes/trading-strategy-covered-put-02-02-2016.
3. ↑ Natenberg, Sheldon (1994). Option volatility and pricing: advanced trading strategies and techniques (1st ed.). McGraw Hill. pp. 260-263.
4. ↑ Zeng, Kai; Schultz, Jim (29 September 2021). "Covered Calls & Poor Man's Covered Calls" (in en). https://www.tastytrade.com/shows/from-theory-to-practice/episodes/core-strategies-covered-calls-poor-mans-covered-calls-09-29-2021.

## Bibliography

* Brill, Maria. "Options for Generating Income." Financial Advisor. (July 2006) pp. 85–86.
* Calio, Vince. Covered Calls Become Another Alpha Source." Pensions & Investments. (May 1, 2006).
* "Covered Call Strategy Could Have Helped, Study Shows" Pensions & Investments, Sept. 20, 2004, p. 38.
* Crawford, Gregory. "Buy Writing Makes Comeback as Way to Hedge Risk." Pensions & Investments. May 16, 2005.
* Demby, Elayne Robertson. "Maintaining Speed -- In a Sideways or Falling Market, Writing Covered Call Options Is One Way To Give Your Clients Some Traction." Bloomberg Wealth Manager, February 2005.
* Feldman, Barry, and Dhruv Roy, "Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index." The Journal of Investing . (Summer 2005).
* Frankel, Doris. "Buy-writes Catch on in Sideways U.S. Stock Market." Reuters. (Jun 17, 2005).
* Fulton, Benjamin T., and Matthew T. Moran. "BuyWrite Benchmark Indexes and the First Options-Based ETFs" Institutional Investor—A Guide to ETFs and Indexing Innovations (Fall 2008), pp. 101–110.
* Szado, Edward, and Thomas Schneeweis. QQ_Active_Collar_Paper_website_v3 "Loosening Your Collar: Alternative Implementations of QQQ Collars.[yes|permanent dead link|dead link}}]" CISDM, Isenberg School of Management, University of Massachusetts, Amherst. (Original Version: August 2009. Current Update: September 2009).
* Kapadia, Nikunj, and Edward Szado. "The Risk and Return Characteristics of the Buy-Write Strategy on the Russell 2000 Index." The Journal of Alternative Investments. (Spring 2007). pp. 39–56.
* Renicker, Ryan, Devapriya Mallick. "Enhanced Call Overwriting." Lehman Brothers Equity Derivatives Strategy. (Nov 17, 2005).
* Tan, Kopin. "Better Covered Calls. Covered-Call Writing Yields Higher Returns in Down Markets." Barron's: The Striking Price. (Nov 28, 2005).
* Tan, Kopin. "More Bang, Less Buck. Selling Call Options." Barron's, SmartMoney. (Dec. 2, 2005).
* Hill, Joanne, Venkatesh Balasubramanian, Krag (Buzz) Gregory, and Ingrid Tierens. "Finding Alpha via Covered Index Writing." Financial Analysts Journal. (Sept.-Oct. 2006). pp. 29-46.
* Lauricella, Tom. "'Buy Write' Funds May Well Be The Right Strategy." Wall Street Journal. (Sep 8, 2008). pg. R1.
* Moran, Matthew. "Risk-adjusted Performance for Derivatives-based Indexes - Tools to Help Stabilize Returns." The Journal of Indexes. (Fourth Quarter, 2002) pp. 34 – 40.
* Schneeweis, Thomas, and Richard Spurgin. "The Benefits of Index Option-Based Strategies for Institutional Portfolios" The Journal of Alternative Investments, Spring 2001, pp. 44 – 52.
* Tan, Kopin. "Covered Calls Grow in Popularity as Stock Indexes Remain Sluggish." The Wall Street Journal , April 12, 2002.
* Tergesen, Anne. "Taking Cover with Covered Calls." Business Week, May 21, 2001, p. 132.
* Tracy, Tennille. "'Buy-Write' Is Looking Attractive." The Wall Street Journal. (Dec 1, 2008). pg. C6.
* Whaley, Robert. "Risk and Return of the CBOE BuyWrite Monthly Index." The Journal of Derivatives (Winter 2002) pp. 35 – 42.

* v
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Derivatives market

Derivative (finance)

Options|

| Terms|

* Credit spread
* Debit spread
* Exercise
* Expiration
* Moneyness
* Open interest
* Pin risk
* Risk-free interest rate
* Strike price
* the Greeks
* Volatility

|

Vanilla options|

* American
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* Put
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Exotic options|

* Asian
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Combinations|

* Collar
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Spreads|

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Valuation|

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Swaps|

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Exotic derivatives|

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Other derivatives|

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Market issues|

* Consumer debt
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