When you sell call options on stock that you own, they are covered options. That means if the option holder exercises the option, you can deliver your stock to meet your obligation if you are assigned to complete the transaction.
Similarly, if you sell put options on stock and have enough cash on hand make the required purchase if the option holder exercises, the options are covered. Covered puts are also known as cash- secured puts.
One appeal of selling a covered call is that you collect the premium but don’t risk potentially large losses. Otherwise, you may have to buy the stock at a higher market price in order to meet your obligation to deliver stock at the strike price if the option is exercised.
The downside is that if your stock is called away from you, you’ll no longer be in a position to profit from any potential dividends or increases in price.
Covered option
Crash
A crash is a sudden, steep drop in stock prices. The downward spiral is intensified as more and more investors, seeing the bottom falling out of the market, try to sell their holdings before these investments lose all their value.
The two great US crashes of the 20th century, in 1929 and 1987, had very different consequences. The first was followed by a period of economic stagna- tion and severe depression. The second had a much briefer impact. While some investors suffered huge losses in 1987, recovery was well under way within three months.
In the aftermath of each of these crashes, the federal government insti- tuted a number of changes designed to reduce the impact of future crashes.
Credit
Credit generally refers to the ability of a person or organization to borrow money, as well as the arrangements that are made for repaying the loan and the terms of the repayment schedule.
If you are well qualified to obtain a loan, you are said to be credit-worthy.
Credit is also used to mean positive cash entries in an account. For example, your bank account may be credited with interest. In this sense, a credit is the opposite of a debit, which means money is taken from your account.
Credit bureau
The three major credit bureaus—Equifax, Experian, and TransUnion—collect information about the way you use credit and make it available to anyone with a legitimate business need to see it, including potential lenders, landlords, and current or prospective employers.
The bureaus keep records of the credit accounts you have, how much you owe, your payment habits, and the lenders and other businesses that have accessed your credit report.
Credit bureaus, also known as credit reporting agencies, store other
information about you as well, such as your present and past addresses, Social Security number, employment history, and information in the public record, including bankruptcies, liens, and any judgments against you.
However, there are certain things, by law, your credit report can’t include, including your age, race, religion, political affiliation, or health records.
You are entitled to a free copy of your credit report from each of the three major credit bureaus once a year, but you have to request them through the Annual Credit Report Request Service (www.annualcreditreport.com or 877-322-8228).
If you’ve recently been denied credit, are unemployed, on public assistance, or have a reason to suspect identity theft or credit fraud, you’re also entitled to a free report. In those cases, you should contact the credit bureaus directly.
Credit limit
A credit limit, also known as a credit line, is the maximum amount of money you can borrow under a revolving credit agreement.
For instance, if you have a credit card with a credit limit of $3,000, and you charge $1,000, you can spend $2,000 more before you reach your credit
limit. And if you repay the $1,000 before the end of the month without making additional purchases, your credit limit is back up to $3,000 again.
Most credit issuers charge additional fees or penalties if you exceed your credit limit.
Credit line
A credit line, or line of credit, is a revolving credit agreement that allows you to write checks or make cash with- drawals of amounts up to your credit limit.
When you use the credit—sometimes called accessing the line—you owe interest on the amount you borrow. But when that amount has been repaid you can borrow it again.
A home equity line of credit (HELOC) is secured by your home, but other credit lines, such as an overdraft arrangement linked to your checking account, are unsecured. In general, the interest rate on a secured credit line is less than the rate on an unsecured line.
Credit rating
Your credit rating is an independent statistical evaluation of your ability to repay debt based on your borrowing and repayment history.
If you always pay your bills on time, you are more likely to have good credit and therefore may receive favorable terms on a loan or credit card, such as relatively low finance charges.
If your credit rating is poor because you have paid bills late or have defaulted on a loan, you may be offered less favorable terms or may be denied credit altogether.
A corporation’s credit rating is an assessment of whether it will be able to meet its obligations to bond holders and other investors. Credit rating systems for corporations generally range from AAA or Aaa at the high end to D (for default) at the low end.
Credit report
A credit report is a summary of your financial history. Potential lenders will use your credit report to help them evalu- ate whether you are a good credit risk.
The three major credit-reporting agencies are Experian, Equifax, and Transunion. These agencies collect certain types of information about you, primarily your use of credit and informa- tion in the public record, and sell that information to qualified recipients.
As a provision of the Fair and Accurate Credit Transaction Act (FACT Act), you are entitled to a free copy of your credit report each year from each of the credit reporting agencies.
You also have a right to see your credit report at any time if you have been turned down for a loan, an apartment, or a job because of poor credit. You may also question any information the credit reporting agency has about you and ask that errors be corrected.
If the information isn’t changed fol- lowing your request, you have the right to attach a comment or explanation, which must be sent out with future reports.
Credit score
Your credit score is a number, calculated based on information in your credit report, that lenders use to assess the credit risk you pose and the interest rate they will offer you if they agree to lend you money.
Most lenders use credit scores rather than credit reports since the scores reduce extensive, detailed informa- tion about your financial history to a single number.
There are actually two competing credit scoring systems, FICO, which has been the standard, and VantageScore, which was developed by the three major credit bureaus.
Their formulas give different weights to particular types of credit-related behavior, though both put the most emphasis on paying your bills on time. They also have different scoring systems, ranging from 300 to 850 for FICO to 501 to 999 for AdvantageScore. The best—or lowest—interest rates go to applicants with the highest scores.
Because your credit score and credit report are based on the same information, it’s very unlikely that they will tell a different story. It’s smart to check your credit report at least once a year, which you can do for free at www.annualcreditreport.com or by calling 877-322-8228.
It may be a good idea to review your score if you anticipate applying for a major loan, such as a mortgage, in the next six months to a year. That allows time to bring your score up if you fear it’s too low.