What is a Covered strategy in Short Options?

A covered strategy is an approach where the options seller provides sufficient collateral to limit the risk of loss.
Selling an options contract without collateral in the underlying asset or cash (naked/uncovered short) can expose the seller to significant risk of loss, including unlimited losses on short calls. Therefore, a covered strategy is the most effective way to manage short options risk.

Types of Covered strategies:

1. Covered Call (Short Call with stock guarantee)
   You sell a Call Option by having the underlying asset as collateral.
   Risk mitigation: If the stock price rises sharply and the contract is exercised, you simply surrender the shares you already own. Any losses from the options position can be offset by the increase in the stock's value.
2. Cash-Secured Put (Short Put with cash collateral)
   You sell a Put Option by providing sufficient cash as collateral.
   Risk mitigation: If the contract is executed, you use the cash funds that have been provided to buy shares at the strike price, so the risk remains measurable.

At Pluang, all Short Options transactions must use a covered strategy, both for Short Call and Short Put.