Covered
"Covered" describes a short options position that is offset by another position the trader already holds, so the risk of the option is limited or eliminated rather than open-ended. It's the opposite of "naked," where the option writer has nothing else in the account to offset the obligation if the option gets exercised against them.
The most common example is a covered call: an investor owns 100 shares of a stock and sells a call option against those shares. If the call is exercised, the investor simply delivers shares they already own, rather than having to buy them at a potentially much higher market price. The stock position "covers" the obligation created by the short call.
The same idea applies more broadly. A short put can be "covered" if the account already holds a short position in the same stock, since being short stock and short a put are offsetting in a similar way. Options can also cover other options: a short call can be covered by owning another call on the same stock with an equal or lower strike price, and a short put can be covered by owning another put with an equal or higher strike price. These option-on-option combinations are really spreads, and they cap the potential loss even though they don't eliminate risk as completely as owning the actual stock does.
The nuance that trips people up is that "covered" is a structural description, not a guarantee of safety. A covered call writer still loses if the stock collapses in price — the option premium collected only offsets losses partially. What "covered" really means is that the trader won't be forced to scramble and buy stock at an unknown, possibly unfavorable price to fulfill the option obligation, and brokers typically apply lower margin requirements to covered positions because the risk profile is more contained.
This term depends on a rule or threshold that changes over time, so no specific figure is quoted here. The definition describes the general mechanics of covered positions correctly, but specific margin treatment for covered vs. naked options (how much collateral or buying power a broker requires) is set by FINRA/exchange margin rules and individual broker policy, which change over time. A human should confirm current margin requirements for covered calls, covered puts, and spread-based coverage against FINRA margin rules and the specific broker's margin schedule before publishing any numeric claims.
Day traders care because whether a position is "covered" or "naked" determines the margin required to hold it and the maximum possible loss if the trade moves against them intraday, which directly affects position sizing and how much buying power is tied up.
A trader owns 100 shares of a stock trading at $50 and sells one call option with a $55 strike for $1.20 in premium. This is a covered call. If the stock rises past $55 and the call is exercised, the trader delivers the 100 shares they already own at $55, keeping the $1.20 premium plus the gain up to $55. They never had to buy shares on the open market to meet the assignment, which is what "covered" protects against.
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