Covered option

A covered option is a financial transaction in which the holder of securities sells (or "writes") an options contract, either a "call option" or a "put option", against stock that they own or are short, respectively.

The seller of a covered option receives compensation, or "premium", for this transaction, which can limit losses; however, the act of selling a covered option also limits profit potential and so the strategy reduces both risk and potential return. One covered option contract is sold for every hundred shares the seller wishes to cover.

A covered option constructed with a call is called a "covered call", while one constructed with a put is a "covered put". Both variants are a short implied volatility strategy.