Word: Covered Option
Part of Speech: Noun
Definition: A "covered option" is a type of financial agreement in which a person holds the actual shares of a stock (or another asset) that they are using to back an option contract. This means that if the option is exercised, they already own the shares needed to fulfill the contract.
Usage Instructions:
"Covered option" is mainly used in finance and investing contexts. It's important to understand how options work and the difference between "covered" and "uncovered" options.
This term is commonly used by investors who want to generate income from their stocks by selling options against shares they own.
Example:
If you own 100 shares of Company XYZ, you can sell a call option on those shares. This means you are offering someone else the right to buy your shares at a certain price within a specific time period. Since you own the shares, this is called a "covered option."
Advanced Usage:
Word Variants:
Covered Call: A specific type of covered option where the investor sells call options on shares they own.
Naked Option: The opposite of a covered option, where the investor does not own the underlying shares.
Different Meaning:
In a broader sense, "covered" can mean protected or shielded from something. For example, if you say, "I am covered by insurance," it means you are protected by an insurance policy.
Synonyms:
Backed option
Secured option
Idioms and Phrasal Verbs:
"To cover one's bases": This means to take necessary precautions to avoid problems. In finance, it can relate to managing risks, similar to using covered options.
"Cover up": While not directly related to finance, this phrase means to hide something or keep it secret.
Summary:
A covered option is a financial tool that involves owning shares of a stock while also selling an option related to those shares. It is safer than an uncovered option because you have the shares to back up your agreement.