Covered Writer

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. Writer

    The seller of an option who collects the premium payment from ...
  3. Allocation Notice

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

    A risk that the writer of an options or futures contract faces ...
  5. Writing An Option

    The expression "writing an option" refers to the act of selling ...
  6. Option

    A financial derivative that represents a contract sold by one ...
Related Articles
  1. Professionals

    Derivative Securities

    NASAA Series 65: Section 10 Derivative Securities. In this section types of derivatives and buying and selling options.
  2. Options & Futures

    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.
  3. Professionals

    Option Positions

    Series 7 - Section8: Option Positions
  4. Professionals

    Managing Risk with Options Strategies: Covered Calls and Protective Puts

    CFA Level 1 - Managing Risk with Options Strategies: Covered Calls and Protective Puts. This section concludes with details on covered or naked options. Learn the components and payoffs behind ...
  5. Options & Futures

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
  6. Professionals

    General Options Terminology

    General Options Terminology
  7. Options Seller Traders

    In contrast to buying options, an options seller trader sells stock options. This comes with an obligation to sell the underlying equity to a buyer if that buyer decides to exercise the option ...
  8. Professionals

    Options: Calls and Puts

    CFA Level 1 - Options: Calls and Puts. Learn the two main types of option derivatives and how each benefits its holder. Provides an example multiple choice question for an option.
  9. Options & Futures

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  10. Options & Futures

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
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. How do the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center