Covered vs
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Questions and Answers

What is the main difference between a covered option and a naked option?

  • The writer is liable for daily margin payments for a naked option, but not for a covered option
  • The writer holds the underlying shares for a naked option, but not for a covered option
  • The writer pays a margin for a covered option, but not for a naked option
  • The writer holds the underlying shares for a covered option, but not for a naked option (correct)

    • What risk does the writer of a naked call option face if the price of the underlying security increases?

  • No risk as long as the option contract is open
  • Limited losses equal to the premium received
  • Margin payments equal to the increase in share price
  • Potentially unlimited losses (correct)

    • Why is writing naked options considered particularly risky?

  • It exposes the writer to potentially unlimited losses (correct)
  • It is only suitable for experienced traders
  • It limits the potential profits for the writer
  • It requires higher margin payments

    • What could be disastrous for the writer of a naked call option?

    <p>An unexpected positive announcement that significantly increases the share price</p> Signup and view all the answers

    What does the potential loss incurred by the writer of an option contract extend beyond?

    <p>The amount of the premium received</p> Signup and view all the answers

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