COVERED OPTION Meaning and
Definition
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A covered option refers to a financial derivative strategy where an investor holds an equal number of long (purchased) options and the underlying asset that the options are tied to. In this strategy, an individual "covers" the short position in a call or put option with an existing holding of the underlying asset. This means that the investor already owns the underlying asset and sells or writes the corresponding call or put options.
The purpose of a covered option strategy is to mitigate risk and generate income. By having the underlying asset as a hedge, the investor can limit potential losses and protect against adverse market movements. If the price of the underlying asset changes unfavorably, the investor can deliver the asset instead of purchasing it at the market price, reducing the potential loss.
Covered options are commonly used when investors have a neutral to bullish outlook on the market. If the price of the underlying asset remains stable or increases, the investor can profit from the premiums received when selling the options. In the case of covered call options, the investor agrees to sell the underlying asset at a predetermined price (the strike price), while covered put options involve the agreement to buy the underlying asset at a specified price.
Overall, a covered option strategy provides investors with a balance between risk and income potential by using a combination of options and the underlying asset.
Common Misspellings for COVERED OPTION
- xovered option
- vovered option
- fovered option
- dovered option
- civered option
- ckvered option
- clvered option
- cpvered option
- c0vered option
- c9vered option
- cocered option
- cobered option
- cogered option
- cofered option
- covwred option
- covsred option
- covdred option
- covrred option
- cov4red option
Etymology of COVERED OPTION
The word "covered option" combines two separate terms: "covered" and "option". Here's a brief explanation of each term's etymology:
1. Covered: The term "covered" in finance refers to a situation where an investment or position is secured or hedged. It comes from the verb form of the Old English word "cover" which meant "to shelter or protect". In financial contexts, "covered" means having enough assets to back up a position or obligation, reducing risk.
2. Option: The word "option" is derived from the Latin word "optio", meaning "choice" or "power of choosing". In finance, an option refers to a contract that gives the holder the right, but not the obligation, to buy or sell a specific asset at a predetermined price within a certain period.
Similar spelling words for COVERED OPTION
