Exact usage of Tag203:CoveredOrUncovered for Options

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1

Imported from previous forum

2

Hello,

Tag203 has two possible values in the SingleOrderMsg: CoveredOrUncovered
But no description on its usage

Does any one knows if it it used:

  1. By the buy-side to report that they are Covered or not by another already existing position (pure reporting for regulation purpose on some countries?)
  2. By the buy-side to ASK the broker to Cover him (like Delta Hedging) ?

Thanks for your advise

3

[ original email was from John Harris - john.harris@bondmart.com ]
The term “covered” applies to short option positions (short meaning you have sold the option). A covered call is a short call combined with a long position in the underlying instrument. A covered put is a short put combined with a short position in the underlying instrument. In each case the position corresponding to the option should be equivalent as to size.

Best,
John

Hello,

Tag203 has two possible values in the SingleOrderMsg: CoveredOrUncovered
But no description on its usage

Does any one knows if it it used:

  1. By the buy-side to report that they are Covered or not by another already existing position (pure reporting for regulation purpose on some countries?)
  2. By the buy-side to ASK the broker to Cover him (like Delta Hedging) ?

Thanks for your advise

4

Thank you

Does that means the buy-side:
WISHES to be covered with a position in the underlying instrument
or
IS ALREADY covered with a position in the underlying instrument ?

The term “covered” applies to short option positions (short meaning you have sold the option). A covered call is a short call combined with a long position in the underlying instrument. A covered put is a short put combined with a short position in the underlying instrument. In each case the position corresponding to the option should be equivalent as to size.

Best,
John

Hello,

Tag203 has two possible values in the SingleOrderMsg: CoveredOrUncovered
But no description on its usage

Does any one knows if it it used:

  1. By the buy-side to report that they are Covered or not by another already existing position (pure reporting for regulation purpose on some countries?)
  2. By the buy-side to ASK the broker to Cover him (like Delta Hedging) ?

Thanks for your advise

5

[ original email was from John Harris - john.harris@bondmart.com ]
When someone submits an order to sell a put or a call, he DECLARES whether he is covered. Whether he in fact is covered is another matter. But in practice, in order to implement a covered option position, one should first implement the appropriate position in the underlying, then submit the corresponding option order, declared to be covered. The recipient of the order is well-advised to validate the existence of the underlying position before executing the option order. Otherwise the seller of the option will hold a “naked” position, which may lead to severe losses.

Please note that “covered” refers to the option position, not to the entity submitting the order. So “buy-side” and “sell-side” alike may enter into covered options positions.

Thank you

Does that means the buy-side:
WISHES to be covered with a position in the underlying instrument
or
IS ALREADY covered with a position in the underlying instrument ?

The term “covered” applies to short option positions (short meaning you have sold the option). A covered call is a short call combined with a long position in the underlying instrument. A covered put is a short put combined with a short position in the underlying instrument. In each case the position corresponding to the option should be equivalent as to size.

Best,
John

Hello,

Tag203 has two possible values in the SingleOrderMsg: CoveredOrUncovered
But no description on its usage

Does any one knows if it it used:

  1. By the buy-side to report that they are Covered or not by another already existing position (pure reporting for regulation purpose on some countries?)
  2. By the buy-side to ASK the broker to Cover him (like Delta Hedging) ?

Thanks for your advise

6

All clear, thanks a lot !

When someone submits an order to sell a put or a call, he DECLARES whether he is covered. Whether he in fact is covered is another matter. But in practice, in order to implement a covered option position, one should first implement the appropriate position in the underlying, then submit the corresponding option order, declared to be covered. The recipient of the order is well-advised to validate the existence of the underlying position before executing the option order. Otherwise the seller of the option will hold a “naked” position, which may lead to severe losses.

Please note that “covered” refers to the option position, not to the entity submitting the order. So “buy-side” and “sell-side” alike may enter into covered options positions.

Thank you

Does that means the buy-side:
WISHES to be covered with a position in the underlying instrument
or
IS ALREADY covered with a position in the underlying instrument ?

The term “covered” applies to short option positions (short meaning you have sold the option). A covered call is a short call combined with a long position in the underlying instrument. A covered put is a short put combined with a short position in the underlying instrument. In each case the position corresponding to the option should be equivalent as to size.

Best,
John

Hello,

Tag203 has two possible values in the SingleOrderMsg: CoveredOrUncovered
But no description on its usage

Does any one knows if it it used:

  1. By the buy-side to report that they are Covered or not by another already existing position (pure reporting for regulation purpose on some countries?)
  2. By the buy-side to ASK the broker to Cover him (like Delta Hedging) ?

Thanks for your advise