Investment Dictionary For Covered Calls
The concepts involved in covered call investing are fairly straightforward. But sometimes the lingo gets in the way of understanding how it all works. We've put together this Investment Dictionary For Covered Calls to help beginners figure out what everyone is talking about.
Dictionary of Terms Used In Covered Calls
Term |
Definition |
|---|---|
| annualized return | An investment's return, adjusted for the holding period, as if you had held the investment for a year. For example, a 2% return in 1 month is a 24% annualized return. Using annualized returns lets you compare investments of different durations to each other. See Returns Tutorial. |
| assignment | What happens to the seller of a call option (eg. a covered call writer) when it's time to give up his shares in exchange for cash. See Will I Be Assigned?. |
| at the money (ATM) | An option whose strike price is the same, or very near, the underlying stock's current price. See Moneyness Tutorial. |
| Born To Sell | World's greatest covered call screener and covered call portfolio management software. See Reviews. |
| BTO, STO, BTC, STC | Short hand for option order types: "buy to open" (you are buying an option long), "sell to open" (you are shorting an option), "buy to close" (you are covering a short option position), and "sell to close" (you are exiting a long option position). |
| buy-write | A covered call transaction where both parts of the trade are done at the same time: An investor 'buys' the stock and simultaneously 'writes' (sells) a call option. |
| call option | A tradable security that gives the buyer of the call option the right to buy stock at a certain price ("strike price") on or before a certain date ("expiration date"). See Call Option Tutorial. |
| covered call (CC) | An income-oriented investment where an investor who owns shares will sell a call option against those shares. He receives cash today in exchange for putting a cap on his upside. See Covered Call Tutorial. |
| cash-secured put (CSP) | An investor sells a naked put option but has cash in his account to cover a potential assignment. It has the same profit and loss potential as a covered call. See Naked Put vs. Covered Call. |
| diagonal spread | A two part trade where you are long one call option and short another call option. See LEAP Covered Writes. |
| ex-div date | The first day the stock trades without (i.e. 'ex') the dividend. You must own the stock when the market closes on the day before the ex-div date if you want to receive the dividend. See Ex-Div Date Tutorial. |
| exercise | The buyer of a call option will exercise his right to buy shares if he wants to give cash and receive stock in exchange. See Option Exercise Tutorial. |
| greeks | A set of option-related statistics used by advanced traders. They are named after letters in the greek alphabet with the more commonly used ones being: delta, gamma, theta, and vega. See Wikipedia Greeks if you really want to know more (or if you need something to help you fall asleep at night). |
| in the money (ITM) | An option whose strike price is less than the underlying stock's current price. See Moneyness Tutorial. |
| intrinsic value | A portion of an option's price equal to the stock price minus the option's strike price, but never less than zero. See Time Premium In Options and Intrinsic Value Tutorial. |
| LEAP | Long-term Equity Anticipation Security. Any option with an expiration date more than a year from today. Can be used for covered calls; see LEAP Covered Writes. |
| long | Buying something and owning it, with a plan to sell it later for a higher price. See Long vs. Short Tutorial. |
| market cap | The number of shares in a company times the share price = the market capitalization. |
| margin | Borrowing money from your broker to invest. Risky. |
| moneyness | The relationship between stock price and option strike price. There are 3 types of moneyness: ATM, ITM, OTM. See Moneyness Tutorial. |
| naked put (NP) | An investment where the investor sells a put option without being short an equivalent number of shares. It has the same profit and loss potential as a covered call. See Naked Put vs. Covered Call. |
| net debit | The cost to complete both sides of a buy-write (covered call) transaction. It is the amount you pay for buying the stock minus the amount you receive for selling the call option. It is also your initial break-even point for a covered call investment. See Net Debit Tutorial. |
| open interest | The number of option contracts that exist for a specific combination of underlying stock, expiration, and strike price. See Open Interest Tutorial. |
| option price | The cost to buy or sell an option contract. The price is expressed as a bid price and an ask price, like a stock. An option's price is equal to the sum of the option's time premium and its intrinsic value. See Time Premium In Options. |
| out of the money (OTM) | An option whose strike price is above the underlying stock's current price. See Moneyness Tutorial. |
| premium | Price of the option (see "option price" above). |
| put option | A tradable security that gives the buyer of the put option the right to sell stock at a certain price ("strike price") on or before a certain date ("expiration date"). See Option Tutorial. |
| return if called | A covered call's return if the underlying stock is called away on option expiration day (which it will be if the stock's price is greater than the option's strike price). See Returns Tutorial and Will I Be Assigned?. |
| return if flat | A covered call's return if the underlying stock price is flat (unchanged) between today and option expiration day. See Returns Tutorial. |
| rolling | The act of adjusting an existing option position. Rolling involves buying back the existing options and selling new ones at different strike prices and/or expiration dates. |
| short | Selling something without owning it, with a plan to buy it back later for a lower price. See Long vs. Short Tutorial. |
| strike price | An attribute of an option contract. It is the price agreed to between the buyer and seller of the contract as to how much will be paid for the shares if the option is exercised. |
| time premium | The option price minus any intrinsic value. It is the source of a covered call investor's income. See Time Premium In Options and Time Premium Tutorial. |
| underlying | Short for "underlying security" (e.g. stock) which is the security subject to being bought or sold by the option. |
| weeklies | Options expiring near term (5-6 weeks) but not on the 3rd Friday of the month (3rd Friday expirations are "monthlies"). See Weekly Options. |
| writer | An investor who sells (writes) an option and collects premium from the option buyer. |
| writing an option | Synonym for "selling an option short". |
Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.