DEFINITION of 'Covered Writer'

An options seller who owns the underlying security represented by the options contract. A covered writer holds the underlying security as a hedge against the options contract. If the options contract is exercised, the covered writer can "cover" the contract because he or she holds the underlying security. Options are contracts that give the buyer the right but not the obligation to buy (call) or sell (put) shares at a particular price and future date.

BREAKING DOWN 'Covered Writer'

Covered options writers limit risk by owning the underlying security. The covered writer profits by receiving premiums paid by the purchaser of the options contract. Covered writing is generally more conservative that naked writing, where the options seller does not own the underlying security.

RELATED TERMS
  1. Naked Writer

    An options seller who does not own the underlying security for ...
  2. Allocation Notice

    An official notification from an options clearing firm to the ...
  3. Pin Risk

    A risk that the writer of an options or futures contract faces ...
  4. Writer

    The seller of an option who collects the premium payment from ...
  5. Option

    A financial derivative that represents a contract sold by one ...
  6. Premium Income

    1. In investing, income that is earned through the sale of an ...
Related Articles
  1. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  2. Trading

    Income Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  3. Trading

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  4. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  5. Personal Finance

    Becoming A Financial Writer

    Instead of working on Wall Street, write about it.
  6. Trading

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
  7. Investing

    Writing Covered Calls On ETFs

    The strategy of writing covered calls on ETFs can limit your losses and hedge risk, but they cap your upside potential.
  8. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
RELATED FAQS
  1. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
  2. My brokerage firm won't allow naked option positions. What does this mean?

    A naked position refers to a situation in which a trader sells an option contract without holding a position in the underlying ... Read Answer >>
  3. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  4. What is the difference between open interest and volume?

    Learn more about options, what options' volume and open interest are and the difference between volume and open interest ... Read Answer >>
  5. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
  6. What is the difference between a banker's acceptance and a post-dated check?

    Learn more about speculation, stocks and options and how speculators use these financial instruments in an attempt to profit ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center