What is a “covered option sale”?
A covered sale means you already own an asset or position that protects you from potential losses on the sold option.
For example:
- You own 100 Apple shares and sell 1 Apple Call — your risk is limited because, if the option is exercised, you simply sell the shares you already own.
- Or you hold another option that offsets the risk (for instance, a purchased Call with the same expiration date).
A covered sale allows you to earn a premium without exposing yourself to unlimited losses.
What is an “uncovered option sale”?
An uncovered (or “naked”) sale occurs when you sell an option without owning the underlying asset or another option that would hedge your position.
For example:
- You don’t own the stock but sell a Call — if the stock price rises sharply, you’ll be forced to sell at a lower strike price, which can lead to unlimited losses.
- You don’t have a short stock position but sell a Put — if the stock price drops significantly, you’ll be obligated to buy it at a much higher price.
Such trades are allowed only for qualified investors due to the high level of risk involved.