A covered call option is one whereby the writer owns the underlying asset on which the option is written. Generally, a covered call would only be written if the writer believed volatility to be overpriced in the market – the lower the volatility, the less premium the writer gains in return for giving up their upside in the underlying.
A covered put option is one whereby the writer sells the option while holding cash. This technique is used to increase income by receiving option premium. If the market goes down and the option is exercised, the cash can be used to buy the underlying to cover.
Covered put writing is often used as a way of target buying. If an investor has a target price at which he wants to buy, he can set the strike price of the option at that level and receive option premium to increase the yield of the asset. Investors also sell covered puts if markets have fallen quickly but seem to have bottomed, because of the high volatility typically received in the option.
* see also naked option
The Energy Risk Glossary, now in its eighth edition, provides an at-a-glance explanation of the myriad specialised terms and acronyms used in energy trading and risk management.
This year, the guide has been updated by Aviv Handler of ETR Advisory. Energy Risk would like to thank him for his input into this edition, which benefits greatly from his valuable experience and insight into energy markets.
The fast-changing nature of these markets means much has changed since our last edition – almost 200 new entries and revisions have been made this year. Reflecting the increasing importance of regulation, definitions of the Markets in Financial Instruments Directive (MiFid) and the Ljubljana-based Agency for the Cooperation of Energy Regulators (Acer) make it into the glossary for the first time. A focus on improving back-office infrastructure and mitigating counterparty risk is also apparent from the inclusion of terms such as ‘portfolio reconciliation’ and ‘portfolio compression’.
The glossary is extensively cross-referenced, making for easy and thorough searches. We hope you find it useful.
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