Listen to a Business English Dialogue About Covered option
Eleanor: Hi Steven, have you heard about covered options in finance? I’ve seen the term, but I’m not entirely sure what it means.
Steven: Hey Eleanor, a covered option is an options trading strategy where the seller of the option holds an offsetting position in the underlying asset, such as stocks or bonds. It’s a way to generate income from selling options while limiting risk by owning the underlying asset.
Eleanor: Oh, I see. How do covered options differ from other options trading strategies?
Steven: Covered options differ from naked options, where the seller does not hold an offsetting position in the underlying asset and is exposed to potentially unlimited risk. With covered options, the seller has protection against adverse price movements in the underlying asset.
Eleanor: That makes sense. What are some advantages of using covered options?
Steven: One advantage of using covered options is that it allows investors to generate income from selling options premiums without taking on excessive risk. Additionally, covered options can be used to hedge against potential losses in the underlying asset or to enhance portfolio returns.
Eleanor: Got it. Are there any limitations or risks associated with covered options?
Steven: Yes, Eleanor. While covered options can provide income and risk mitigation benefits, there are still risks involved, such as potential losses if the price of the underlying asset moves unfavorably. Additionally, covered options may limit potential upside gains compared to other options strategies.
Eleanor: Thanks for explaining, Steven. It’s helpful to understand how covered options work and their potential benefits and risks.
Steven: You’re welcome, Eleanor. Covered options can be a useful tool for investors looking to generate income and manage risk in their portfolios. If you have any more questions, feel free to ask!