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.

  1. Writing An Option

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

    A type of options contract that is not backed by an offsetting ...
  3. Exercise

    To put into effect the right specified in a contract. In options ...
  4. Back Fee

    A payment made to the writer of a compound option in the case ...
  5. Put

    An option contract giving the owner the right, but not the obligation, ...
  6. Escrow Receipt

    A bank guarantee that an option writer has the underlying security ...
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