What Is a Covered Writer?

A covered writer is an investor or trader who holds the underlying security as a hedge against the options contract they are selling. Since the investor already owns the underlying asset, they may cover any call before or at the expiration date of t♑he option, thus limiting risk.

Understanding a Covered Writer

A covered writer is an 澳洲幸运5官方开奖结果体彩网:options seller who owns the underlying asset represented by the 澳洲幸运5官方开奖结果体彩网:options contract. Because the covered writer holds the underlying security, if and when the o🌼ption contract is exercised, the covered writer can “cove♋r” the agreement without the need to go into the open marketplace.

澳洲幸运5官方开奖结果体彩网:Covered writers limit their risk by owning the underlying security. This strategy is a conservative approach and is in contrast to 澳洲幸运5官方开奖结果体彩网:naked writing. Naked writing is when the options seller does not hold t♒he underlying security, and if called, must go into the market to buy the asset.

How Does a Covered Writer Make Money?

The covered writer profits by receiving premiums paid by the purchaser of the options contract. Those contracts give the buyer of the option the right, but not the obligation, to buy, if it's a call, or sell, if it's a put, the asset at a particular💫 price on or by a specific future date.ဣ

Imagine you own 100 shares of ZXY stock, which is trading at $100 per share. You can sell the right, or the opti⛦on, to buy that stock six months🦂 in the future at a set price of $105.

Because that stock could be worth more than $105 at the end of the six months, the buyer of the option will pay $5 per share for the opportunity to buy the ZXY stock at a potential discounted rate later. The buyer has no obligation to buy the stock should the asset depreciate before the expiration date of the option. In the present, the seller receives a $500 premium for their stock, and can potentially earn $10,500 if the buyer chooses to buy the 🦩stock a💦t the end of six months.

By paying this premium, the buyer is investing in a certain amount of risk by betting that the stock could go up. For example, at the end of six months, the 🅘stock could rise to $125, which means the buyer could sell it for $12,500. This would be a profit of $1,500 (a $2,000 dollar gain from the share p𒁏rice increase, less the $500 dollar cost for the call contract).

Covered Writers in Other Situations

Option contracts may become quite complicated by their association with stoc꧃k trading and the application of a call option on a physical property. If you are a homeowner, you could find yourself a covered writer.

As an example, Robert owns a home🌳 worth $300,000 and a We-R-Land Development approaches him with an offer to buy the property for $350,000. However, the developer🦂 will only buy the property if specific real estate laws are put in place over the next five years.

Operating as a covered writer, Robert may sell the developer a call option on the property with a price of the option at a 3% payment of the total cost, or $10,500. We-R-Land Development may then lock in the $350,000 purchase price regardless of the 澳洲幸运5官方开奖结果体彩网:market value increase of the🦩 home at the end of those five 𓂃years.

However, if the real esta💫te laws are not enacted and the developer chooses not to buy the property, as the covered w🌳riter, Robert will still have made $10,500.