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Covariance
A statistical measure of the degree to which random variables move together. A positive covariance implies
that one variable is above (below) its mean value when the other variable is above (below) its mean value.
Covenants
Provisions in a bond indenture or preferred stock agreement that require the bond or preferred stock issuer
to take certain specified actions (affirmative covenants) or to refrain from taking certain specified actions
(negative covenants).
Cover
The purchase of a contract to offset a previously established short position.
Coverage initiated
Usually refers to the fact that analysts begin following a particular security. This usually happens when a
security become sufficiently large to warrant attention by the investment community.
Coverage ratios
Ratios used to test the adequacy of cash flows generated through earnings for purposes of meeting debt
and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.
Covered call
A short call option position in which the writer owns the number of shares of the underlying stock
represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock
does not have to be bought at the market price, if the holder of that option decides to exercise it.
Covered call writing strategy
A strategy that involves writing a call option on securities that the investor owns in his or her portfolio. See:
covered or hedge option strategies.
Covered interest arbitrage
A portfolio manager invests dollars in an instrument denominated in a foreign currency and hedges his
resulting foreign exchange risk by selling the proceeds of the investment forward for dollars.
Covered option
Applies to derivative products. Option position that is offset by an equal and opposite position in the
underlying security. Antithesis of naked option.
Covered or hedge option strategies
Strategies that involve a position in an option as well as a position in the underlying stock, designed so that
one position will help offset any unfavorable price movement in the other, including covered call writing and
protective put buying. Related: naked strategies
Covered Put
A put option position in which the option writer also is short the corresponding stock or has deposited, in a
cash account, cash or cash equivalents equal to the exercise of the option. This limits the option writers risk
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