Covered call when stock position is at a loss
It's unclear what you're asking. When I originally read your question, it seemed that you had closed out one options position and opened another. When I read your question the second time, it seemed that you were writing a second option while the first was still open. In the second case, you have one covered and one naked position. The covered call will expire worthless, the naked call will expire in the money. How your broker will resolve that is a question best left for them, but my expectation is that they will assign the non-worthless calls. Whereas, if both options expired in the money, you would be assigned and you would have to come up with the additional shares (and again, that depends on how your broker works). In general, for both cases, your net is the premiums you received, plus the difference between strike price and the price that you paid for the stock, minus any cost to close out the position. So whether you make a profit is very much dependent on how much you received for your premiums. Scenario #1: close first call, write second: Scenario #2: write covered + naked, one expires worthless Scenario #3: write covered + naked, both expire in the money Disclaimer: the SEC does not consider me a financial/investment advisor, so this is not financial/investment advice "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." An expired option is a stand-alone event, sold at $X, with a bought at $0 on the expiration date.  The way you phrased the question is ambiguous, as 'decrease toward zero' is not quite the same as expiring worthless, you'd need to buy it at the near-zero price to then sell another covered call at a lower strike.  Edit - If you entered the covered call sale properly, you find that an in-the-money option results in a sale of the shares at expiration. When entered incorrectly, there are two possibilities, the broker buys the option back at the market close, or you wake up Sunday morning (the options 'paperwork' clears on Saturday after expiration) finding yourself owning a short position, right next to the long. A call, and perhaps a fee, are required to zero it out.  As you describe it, there are still two transactions to report, the option at $50 strike that you bought and sold, the other a stock transaction that has a sale price of the strike plus option premium collected. I don't think you understand options. If it expires, you can't write a new call for the same expiration date as it expired that day. Also what if the stock price decreases further to $40 or even more? If you think the stock will move in either way greatly, and you wish to be profit from it, look into straddles.
It definitely depends on your risk appetite as Joe Taxpayer pointed out in his answer. Covered calls are a good choice for someone who already own's the stock, because the premium collected reduces the cost basis for the position. The downside is that if the calls are exercised, there is a good chance that you are missing out on additional upside in the stock price (because the strike is obviously below the market value for the stocks).  Another good option trade is the spread option. This would allow you to capture the difference between the two strikes of the options in the spread. This is also one of the less risky choices because your initial cost an potential profit/loss are known in advance of entering the position. I guess the opposite of being hedged is being unhedged. Typically, a hedge is an additional position that you would take on in order to mitigate the potential for losses on another position. I'll give an example: Say that I purchase 100 shares of stock XYZ at $10 per share because I believe its price will increase in the future.  At that point, my full investment of $1000 is at risk, so the position is not hedged. If the price of XYZ decreases to $8, then I've lost $200.  If the price of XYZ increases to $12, then I've gained $200; the profit/loss curve has a linear relationship to the future stock price. Suppose that I decide to hedge my XYZ position by purchasing a put option. I purchase a single option contract (corresponding to my 100 shares) with a strike price of $10 and an expiration date in January 2013 for a price of $0.50/share. This means that until the contract expires, I can always sell my XYZ shares for a minimum of $10.  Therefore, if the price of XYZ decreases to $8, then I've only lost $50 (the price of the option contract), compared to the $200 that I would have lost if the position was unhedged.  Likewise, however, if the price increases to $12, then I've only gained a net total of $150 due to the money I spent on the hedge. (the details of how much money you would actually lose in the hedged scenario are simplified out above; even out-of-the-money options retain some value before expiration, but pricing of options is outside of the scope of this post) So, as a more pointed answer to your question, I would say that the hedged/unhedged status of a position can be characterized by its potential for loss. If you don't have any other assets that will increase in value to offset losses on your position of interest, I would call it unhedged. Indeed, there is conservation of money.  If the insurance companies have those big buildings and television commercials and CEOs, then that money comes from only one place: the insurance premiums of customers.  To say insurance is a good deal is either The benefit and cost of insurance for most: Indeed, of all the answers here, James Turner's is best.  If you can't afford to lose something, it is vital to insure it.  Ideally insurance would be a non-profit operation to best cover this.  Such that people would as a whole lose nothing.  Theoretically it could even be slightly for profit by making wise investment decisions, and benefiting from the future value of money by beating inflation.  But they don't (see this writeup for slightly dated information on health, and this Wikipedia article for more direction). But even if you are taking an average loss (by using a profit-making insurance company), by taking insurance you avoid the situation where you're crippled by a catastrophe.  You are paying a fee to hedge your losses.  Like James said, insure what you cannot afford to lose.  But realize you're going into a situation where the overall net is an average loss of between 10-50% of your money, on average.  Basically you're playing the lottery, except your net losses mostly go to fund the company and the CEOs rather than nominally support education. But you sounded like you understood those ideas well, so...   Can you self insure? As others noted, yes, there is the option of self insurance in most places.  Even even often when insurance is considered as required.  For example, in the US, basically car insurance coverage is required.  But generally you are legally able to self insure to cover this requirement:   The cost of self insuring: There is one cost to self-insure: time.  It takes time to research the laws, time to to satisfy those requirements, and then time to find/setup all the care providers (doctors, mechanics, lawyers, etc). When is it worth it?  First, again, you must satisfy the prerequisite: you are able to financially handle the loss of the topic under consideration. At a commenter's request, here is an attempt to better spell out this requirement (though it doesn't appear pertinent to the question asked, it is indeed very important not to mistakenly assume you satisfy this requirement). Can you comfortably cover the level of insurance you would otherwise be taking out.  $50,000/$100,000/$50,000 is a common reasonable insurance level, so that would be $200,000.  Basically, have enough money to cover the loss of your car, your possible injury expenses, and most importantly the damage and medical of anyone else you hit.  You would need to have that value available, optimally in your accounts.  Alternatively, you could weigh it against your assets, such that if you had low accounts but a paid off $200,000 house, you could conceivably sell your property and still be able to survive financially afterwards.  However, it is indeed dangerous to make this assumption, as there may be additional costs and troubles in selling assets, and you may fail to recognize how precious the property is to you.  Having at least double or triple in property you'd be willing to part with might be a more comfortable number.  Again, the main idea is: can you afford to lose the insured value tomorrow?  Though you hope it wouldn't happen, if someone came and took $200,000+ of yours tomorrow, would you be able to adjust to it relatively easily?  If the answer is yes, you've satisfied this requirement.  In many states it's easier to understand whether you can meet this requirement: it instead becomes can you take out the liability bond required. If you've met that requirement, then it comes down to the time you'd lose versus the savings you'd gain.  To get a fair idea, you'll need: The premium you would pay to purchase the insurance: Since you are likely losing 10-50% of your premiums, it should be fair to make a rough estimate of value lost by using 25% for most purposes (especially given that this still ignores the future value/opportunity cost of your money, which could often be 5-10% if invested well) The value of your time:  You must properly identify either:   A rough estimate of how much time it will take you to research the legal requirements and meet them, and then to research/handle the subsequent needs that come up which the insurance would take care of in an average year.  So try to balance those typical years where you wouldn't have a lot of work to do with a year where you'd need to call repair mechanics or find health practitioners.  Perhaps aim high, research/calling usually takes more time than we think.   Is this calculation positive? Your estimated net annual benefit (or cost) from self insuring is: 0.25 * (Insurance Premium Per Year) - (Estimated Value of Your Time)*(Estimated Hours Of Work\Research to Self-Insure Per Year)  This is a rough estimate.  But if the result is quite positive (and you can afford to cover the hit the insurance would otherwise cover), you're likely better off self-insuring. If the result is quite negative (or you can't cover the possible costs insurance would cover), you're probably better off buying insurance. Finally, indeed there are still a few other factors on each side to consider... Most often those additional pluses and minuses probably are smaller than the primary cost/benefits spelt out earlier.  But if you're rich enough to have the money, you're in a situation where you can likely sacrifice a little income to have your peace of mind.  So there's certainly a lot to consider in it.  But if you're a self starter, I believe you're right that you'll find it's more worthwhile to self-insure if you indeed have the resources. "As I stated in my comment, options are futures, but with the twist that you're allowed to say no to the agreed-on transaction; if the market offers you a better deal on whatever you had contracted to buy or sell, you have the option of simply letting it expire. Options therefore are the insurance policy of the free market. You negotiate a future price (actually you usually take what you can get if you're an individual investor; the institutional fund managers get to negotiate because they're moving billions around every day), then you pay the other guy up front for the right of refusal later. How much you pay depends on how likely the person giving you this option is to have to make good on it; if your position looks like a sure thing, an option's going to be very expensive (and if it's such a sure thing, you should just make your move on the spot market; it's thus useful to track futures prices to see where the various big players are predicting that your portfolio will move). A put option, which is an option for you to sell something at a future price, is a hedge against loss of value of your portfolio. You can take one out on any single item in your portfolio, or against a portion or even your entire portfolio. If the stock loses value such that the contract price is better than the market price as of the delivery date of the contract, you execute the option; otherwise, you let it expire. A call option, which is an option to buy something at a future price, is a hedge against rising costs. The rough analog is a ""pre-order"" in retail (but more like a ""holding fee""). They're unusual in portfolio management but can be useful when moving money around in more complex ways. Basically, if you need to guarantee that you will not pay more than a certain per-share price to buy something in the future, you buy a call option. If the spot price as of the delivery date is less than the contract price, you buy from the market and ignore the contract, while if prices have soared, you exercise it and get the lower contract price. Stock options, offered as benefits in many companies, are a specific form of call option with very generous terms for whomever holds them. A swaption, basically a put and a call rolled into one, allows you to trade something for something else. Call it the free market's ""exchange policy"". For a price, if a security you currently hold loses value, you can exchange it for something else that you predicted would become more valuable at the same time. One example might be airline stocks and crude oil; when crude spikes, airline stocks generally suffer, and you can take advantage of this, if it happens, with a swaption to sell your airline stocks for crude oil certificates. There are many such closely-related inverse positions in the market, such as between various currencies, between stocks and commodities (gold is inversely related to pretty much everything else), and even straight-up cash-for-bad-debt arrangements (credit-default swaps, which we heard so much about in 2008)." A stop-loss order becomes a market order when a trade has occurred at or below the trigger price you set when creating the order. This means that you could possibly end up selling some or all of your position at a price lower than your trigger price. For relatively illiquid securities your order may be split into transactions with several buyers at different prices and you could see a significant drop in price between the first part of the order and the last few shares. To mitigate this, brokers also offer a stop-limit order, where you set not only a trigger price, but also a minimum price that you are will to accept for your shares. This reduces the risk of selling at rock bottom prices, especially if you are selling a very large position. However, in the case of a flash crash where other sellers are driving the price below your limit, that part of your order may never execute and you could end up being stuck with a whole lot of shares that are worth less than both your stop loss trigger and limit price. For securities that are liquid and not very volatile, either option is a pretty safe way to cut your losses. For securities that are illiquid and/or very volatile a stop-limit order will prevent you from cashing out at bottom dollar and giving away a bargain to lurkers hanging out at the bottom of the market, but you may end up stuck with shares you don't want for longer than originally planned. It's up to you to decide which kind of risk you prefer. Yes, if the call expires worthless, leaving you with stock. Then you can exercise your put when the stock goes below put strike price. "If you really believe in the particular stocks, then don't worry about their daily price.  Overall if the company is sound, and presumably paying a dividend, then you're in it for the long haul. Notwithstanding that, it is reasonable to look for a way out.  The two you describe are quite different in their specifics. Selling sounds like the simpler of the two, but the trigger event, and if it is automatic or ""manual"" matters.  If you are happy to put in a sell order at some time in the future, then just go ahead with that. Many brokers can place a STOP order, that will trigger on a certain price threshold being hit.  Do note, however, that by default this would place a market order, and depending on the price that breaks through, in the event of a flash crash, depending on how fast the brokers systems were, you could find yourself selling quite cheaply. A STOP LIMIT order will place a limit order at a triggered price.  This would limit your overall downside loss, but you might not sell at all if the market is really running away. Options are another reasonable way to deal with the situation, sort of like insurance.  In this case you would likely buy a PUT, which would give you the right, but not the obligation to sell the stock at the price the that was specified in the option.  In this case, no matter what, you are out the price of the option itself (hence my allusion to insurance), but if the event never happens then that was the price you paid to have that peace of mind. I cannot recommend a specific course of action, but hopefully that fleshed out the options you have." "If the stock is below its purchase price, there is no way to exit the position immediately without taking losses. Since presumably you had Good Reasons for buying that stock that haven't changed overnight, what you should probably do is just hold it and wait for the stock to come back up. Otherwise you're putting yourself into an ongoing pattern of ""buy high, sell low"", which is precisely what you don't want to do. If you actually agree with the market that you made a mistake and believe that the stock will not recover any part of the loss quickly (and indeed will continue going down), you could sell immediately and take your losses rather than waiting and possibly taking more losses. Of course if the stock DOES recover you've made the wrong bet. There are conditions under which the pros will use futures to buffer a swing. But that's essentially a side bet, and what it saves you has to be balanced against what it costs you and how certain you are that you NOW can predict the stock's motion. This whole thing is one of many reasons individuals are encouraged to work with index funds, and to buy-and-hold, rather than playing with individual stocks. It is essentially impossible to reliably ""time the market"", so all you can do is research a stock to death before making a bet on it. Much easier, and safer, to have your money riding on the market as a whole so the behavior of any one stock doesn't throw you into a panic. If you can't deal with the fact that stocks go down as well as up, you probably shouldn't be in the market."