Covered option

A covered option is a financial transaction in which the holder of securities sells (or "writes") a type of financial options contract known as a "call" or a "put" against stock that they own or are shorting. 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 their profit potential to the upside. One covered option 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". This strategy is generally considered conservative because the seller of a covered option reduces both their risk and their return.