What are some ways to mitigate the risks of covered calls?
Two ways to mitigate this risk are to buy a put at a lower premium to the written call, or manage your trade by buying back your call if you see the underlying price going against you - a bit similar to having a stop loss. If the position starts losing money as soon as it is put on, then I would close it out ,taking a small loss. However, if it starts making money,as in the stock inches higher, then you can use part of the premium collected to buy an out of money put, thereby limiting your downside. It is called a collar.
"To short:  Of course, you may always buy some index correlated ETF that eliminates the above. They use stock futures on the index, and you simply buy the ""shorting ETF"" in your non-margin account. However, they are surprisingly high cost, and despite the intended correlation, have significant drag. It's a much safer way to short the market (you have great choice in which market ETF) and eliminates the single stock risk." For a cheaper hedge , you can try a call spread. e.g if you shorted a stock at 40 but are worried that it can get bought out for 60. then buy a 50-60 bull call spread with appropriate number of contracts or even 50-55. this is better than just buying a 50 call as it will be expensive. Also the other option is not to short but buy a debit bear put spread 40-30 near the money and then buy an out of money call spread ( 55-60). "I think what you really want to look into is put options. You can essentially replicate the same thing, without worrying about margin calls. Check out this site http://www.fundamentalfinance.com/options/options-basic-charts.php a quick glance seems to show it to be pretty good.  The way you would limit downside risk is to buy a put option, allowing you to sell anytime within the next n months for the current price (assuming american). This will allow you to limit downside risk, however, potential profits do go down due to fees as another answer suggests this could be cost prohibitive. This type of strategy is also known as a ""protective put"". http://www.optionseducation.org/strategies_advanced_concepts/strategies/protective_put.html If you wanted to be more refined you could use Ak's bands, although you have to be looking for that specific outcome. Also due to complexity, this can become a taxing (in terms of time invested) and risky (if you are wrong) investment. Either way I think you need to study payoff curves a little more." "You may look into covered calls.  In short, selling the option instead of buying it ... playing the house.   One can do this on the ""buying side"" too, e.g. let's say you like company XYZ.  If you sell the put, and it goes up, you make money.  If XYZ goes down by expiration, you still made the money on the put, and now own the stock - the one you like, at a lower price.  Now, you can immediately sell calls on XYZ.  If it doesn't go up, you make money.  If it does goes up, you get called out, and you make even more money (probably selling the call a little above current price, or where it was ""put"" to you at). The greatest risk is very large declines, and so one needs to do some research on the company to see if they are decent -- e.g. have good earnings, not over-valued P/E, etc.  For larger declines, one has to sell the call further out.  Note there are now stocks that have weekly options as well as monthly options.  You just have to calculate the rate of return you will get, realizing that underneath the first put, you need enough money available should the stock be ""put"" to you.   An additional, associated strategy, is starting by selling the put at a higher than current market limit price.  Then, over a couple days, generally lowering the limit, if it isn't reached in the stock's fluctuation.  I.e. if the stock drops in the next few days, you might sell the put on a dip.   Same deal if the stock finally is ""put"" to you.  Then you can start by selling the call at a higher limit price, gradually bringing it down if you aren't successful -- i.e. the stock doesn't reach it on an upswing. My friend is highly successful with this strategy. Good luck" Assignment risk. In your example, if someone exercises OTM call, your account could be assigned. In that case, if you do nothing, you could lose more money than there is in the account. The broker won't do it for you because there is more than one way to handle the assignment. For example, you might choose to exercise the long call, or buy a different call and exercise that. Selling the long call may be enough to satisfy any resulting margin call. In some cases, we when we see an opportunity to save our clients money, without risking valuable coverage or diminishing benefits, we make certain recommendations for more affordable life insurance. One of these strategies is laddering (or layering) term lengths, or term maturities. The strategy is simple. While most people who are considering longer terms, such as 20 or 30 year term, purchase a single policy to fit their needs, the laddering strategy has you purchase two policies totaling the same amount of coverage you currently need, but with a shorter length term mixed with the longer term. For example, instead of purchasing a 30 year term for $1 million dollars, you might purchase two policies for $500,000 each, one with a 15 year term, and the other with a 30 year term. The result is typically a savings of 15%-25% on your term life insurance. Just be aware that the plan going in is to let the first policy go (the one with the shorter term length) when its level term has expired. For example in a 15 year term, the premiums will be guaranteed to stay level the first 15 years, and then increase every year thereafter. There is typically a sizable jump in rates in that 16th year. Clients often see rates increase 8-10 times or more. Therefore, it’s important you understand that going in, and realize you will most likely let that first policy go when the premiums increase, leaving you with the second policy through the end of its (longer) level term. You can crunch some numbers with our laddering calculator: https://www.jrcinsurancegroup.com/term-life-insurance-laddering-calculator/ What Jaydles said. I think of each strategy in terms of Capital at Risk (CaR). It's a good thing to know when considering any position. And then conveniently, the return is always profit / CaR. With covered calls it's pretty easy. Pay $1000 for stock, receive $80 in premium, net CaR is $920.  If you own the stock and write calls many times (that expire worthless, or you that you buy back), there are two measurements to consider. First, treat every covered call as a buy-write. Even if you already own the stock, disregard the real cost basis, and calculate from the moment you write the call, using the stock price at that time. The second measure is more complicated, but involves using something like the XIRR function in a spreadsheet. This tracks the series as a whole, even accounting for times where there is no written call outstanding. For the written put, even though your broker may only require 30% collateral in a margin account, mentally treat them as cash-secured. Strike less premium is your true CaR. If the stock goes to zero by expiration, that's what you're on the hook for. You could just compute based on the 30% collateral required, but in my view that confuses cash/collateral needs with true risk. Note: a written put is exactly identical to a covered call at the same strike. If you tend to favor puts over CCs, ask yourself why. Just like a loaded gun, leverage isn't inherently bad, but you sure want to know when you're using it. I guess I wasn't clear. I want to modestly leverage (3-4x) my portfolio using options. I believe long deep-in-the-money calls would be the best way to do this? (Let me know if not.)  It's important to me that the covariance matrix from the equity portfolio scales up but doesn't fundamentally change. (I liken it to systemic change as opposed to idiosyncratic change.)   This is what I was thinking:  * For the same expiry date, find each positions lowest lambda. * Match all option to the the highest of the lowest lambda. * Adjust number of contracts to compensate for higher leverage.  I don't think this will work because if I matched the lowest lambda of options on bond etfs to my equity options they would be out-of-the-money.  By the way, thanks for your time. Well, premium is the least of my worries. I would rather worry about that than have to worry about a margin call. I hate debt, and so this is the draw for me. I will check on that. I have a few books on options and derivatives, and I find it quite fascinating! I would really like a specific book on future options, but I will take a look through the books I have. Thanks! I'm responsible for all our hedging.  Since we sell the energy to end users we do mostly fixed buys, swaps and calls.  I'm a excel guru and dabble a little in SQL.  we have Crystal Ball as well but i have no idea how to use it.  I guess I'm trying to figure out if there is a tool that people use to help me analyze the spreads. or perhaps some reading material to help me through this. This is what i've been working towards for so long and i really don't want to fuck this up "Covered calls, that is where the writer owns the underlying security, aren't the only type of calls one can write. Writing ""uncovered calls,"" wherein one does NOT own the underlying, are a way to profit from a price drop. For example, write the call for a $5 premium, then when the underlying price drops, buy it back for $4, and pocket the $1 profit." "This doesn't make sense to me. Writing a covered call gives him a long delta position - the exact opposite of what he wants. And the tax losses won't turn a losing position into a winning one.  Is there something I'm missing?  Edit: Also, doesn't ""shorting against the box"" mean he has to have a long position, and short against that? That means you've got zero net delta, which isn't very useful at all..." "If your shares get called on stock at a price below what you paid for the stock, your gain or loss depends on what premium you got for the options you sold.  ""can I deliver shares at that assigned strike using margin or additional capital if I have it? Can the broker just take care of it and let me collect the time premium? "" You don't need margin or any cash because you already hold the shares. A covered call means your cash requirements are 'covered'. So they'll just buy your shares at the strike price of $50. And you still get to keep the premium (which you should have gotten when you sold the covered call).  You only need cash or margin when you've sold an uncovered call or put." You could try to refine your options strategy:  For instance you could buy the USD 750 call option(s) you mentioned and at the same time sell (short) call options with a higher strike price, which is above the share price level you expect that Apple will trade at in one year (for instance USD 1,100).  By doing this, you would receive the premium of the call option(s) with the higher option, which in turn would help you finance buying your USD 750 call(s). The net effect of this trading strategy would be that you would give up the extra profit you would earn if Apple would rose above USD 1,100 (the strike price of the call option sold short). Your total risk would be even less than with your actual strategy (in my view). From my blog's discussion on 2017 tax rates.  This is the final set of numbers. So, if you currently have, say $120K taxable income, every dollar above that starts getting taxed at 25%, until $153K, then 28%.  In other words, forecast your taxes based on the day job, but then the 1099 goes on top of that.