What are Covered and Uncovered Options?


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An option contract is considered covered if the writer owns the underlying asset or has another offsetting option position. In the absence of one of these conditions, the writer is exposed to the risk of having to fulfill the contractual obligations by buying the asset at the time of delivery at an unfavorable price.

 

The call writer may have to purchase the underlying asset at a price that is higher than he strike price. The put writer may have to buy the asset from the holder at a price that creates a loss. When they face such a risk writers are said to be uncovered (or naked).


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