Definition of "Covered Put Option"

Said of a short put option position in which the investor has a short position in the underlying security or a security convertible into the underlying security. For example, an investor is short 500 shares of XYZ (from selling short) and writes (sells) 5 XYZ put options. The short position covers the put options sold--that is, if the writer is assigned (the option is exercised), the short position will meet the obligation of the option contract. When the put writer is assigned, the XYZ is bought from the long put holder and the stock covers (closes) the investor's original short position in the underlying security. Put writers are also considered to be covered if they obtain a bank guarantee letter.