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. Characteristics Covered calls are bullish by nature, while covered puts are bearish. The payoff from selling a covered call is identical to selling a short naked put. Both variants are a short implied volatility strategy. Covered calls can be sold at various levels of moneyness. Out-of-the-money covered calls have a higher potential for profit, but also protect against less risk, as compared to in-the-money covered calls. See also Married put References Bibliography Brill, Maria. "Options for Generating Income." Financial Advisor. (July 2006) pp. 85–86. Calio, Vince. Covered Calls Become Another Alpha Source." Pensions & Investments. (May 1, 2006). "Covered Call Strategy Could Have Helped, Study Shows" Pensions & Investments, Sept. 20, 2004, p. 38. Crawford, Gregory. "Buy Writing Makes Comeback as Way to Hedge Risk." Pensions & Investments. May 16, 2005. Demby, Elayne Robertson. "Maintaining Speed -- In a Sideways or Falling Market, Writing Covered Call Options Is One Way To Give Your Clients Some Traction." Bloomberg Wealth Manager, February 2005. Feldman, Barry, and Dhruv Roy, "Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index." The Journal of Investing . (Summer 2005). Frankel, Doris. "Buy-writes Catch on in Sideways U.S. Stock Market." Reuters. (Jun 17, 2005). Fulton, Benjamin T., and Matthew T. Moran. "BuyWrite Benchmark Indexes and the First Options-Based ETFs" Institutional Investor—A Guide to ETFs and Indexing Innovations (Fall 2008), pp. 101–110. Szado, Edward, and Thomas Schneeweis. QQ_Active_Collar_Paper_website_v3 "Loosening Your Collar: Alternative Implementations of QQQ Collars." CISDM, Isenberg School of Management, University of Massachusetts, Amherst. (Original Version: August 2009. Current Update: September 2009). Kapadia, Nikunj, and Edward Szado. "The Risk and Return Characteristics of the Buy-Write Strategy on the