Chapter 02 · Section 2.1

Covered Option Writing

The loss potential associated with a short call or put is unlimited when the price of the underlying moves adversly to the position holders expectations (ie. increasing for a call and decreasing for a put).

This situation can be modified when the position is combined: A short call position with a long position in the underlying and A short put with a short position in the underlying. When this type of combination is used it is called covered option writing.