An investor who sells an option to offset a stock position he/she holds is said to be selling a(n)
A) Call option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.

Question

An investor who sells an option to offset a stock position he/she holds is said to be selling a(n)
A) Call option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.

Quizplus · Accepted Answer

Selling an option to offset a stock position is known as a covered option, as the investor already holds the underlying stock to cover any potential exercise of the option. Choice A is incorrect as selling a call option without owning the underlying stock is known as a naked call option. Choice B is incorrect as selling a put option to offset a stock position is known as a protective put. Choice C is incorrect as out-of-the-money refers to the strike price of the option being lower than the current stock price for a call option, or higher than the current stock price for a put option. Choice D is incorrect as a naked option refers to selling an option without holding the underlying asset, which is not the case in this scenario.

An Investor Who Sells an Option to Offset a Stock