Understanding Products and Their RisksDifficulty 3/5
An investor writes a call option on shares they already own. How is this position described?
- ACovered, because the underlying shares are already held to meet assignment
- BUncovered, because the underlying shares are already held to meet assignment
- CHedged by an index, because the underlying shares are already held for assignment
- DA European option, because the underlying shares are already held for assignment
Show answer and rationale
Correct: A. Covered means the writer can deliver from an existing holding if assigned. Writing a call without owning the shares is uncovered or naked, and carries theoretically unlimited risk.
- B — Uncovered describes writing a call without owning the underlying shares.
- C — Index hedging is a different strategy and does not describe writing against owned shares.
- D — American versus European describes when an option may be exercised, not whether it is covered.