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.
Your wife could open a non-registered margin trading account with a Canadian full-service or discount broker. An account at one of the top Canadian brokers should provide access to trade U.S.-listed options. I've traded both Canadian and U.S.-listed options with my own broker. On the application, you'd need to indicate an interest in trading options, and more specifically, what kind of option trades; e.g. long puts and calls only, covered writing, combination trades, etc. And yes, part of the application approval process (at least when I went through it) is to answer a few questions to prove that the applicant is aware of the types of risks with trading options. Be sure to do some research on the fees and currency/fx aspects before you choose a broker.  If you plan to exercise any options purchased or expect to be assigned for any you write, be aware that those fees are often different from the headline cost-per-trade advertised by brokers. For instance, I pay in excess of $40 when a call option I write gets assigned, vs. ~$10 that I'd pay if I just plain sold the stock. One other thing to investigate is what kind of online option trading research and order entry tools are available; not every broker has the same set of features with respect to options — especially if it isn't a big part of their business. No, if your stock is called away, the stock is sold at the agreed upon price. You cannot get it back at your original price. If you don't want your stock to be called, make sure you have the short call position closed by expiration if it is ITM.  Also you could be at risk for early assignment if the option has little to no extrinsic value, although probably not. But when dividends are coming, make sure you close your short ITM options. If the dividend is worth more than the extrinsic value, you are pretty much guaranteed to be assigned. Been assigned that way too many times. Especially in ETFs where the dividends aren't dates are not always easy to find. It happens typically during triple witching. If you are assigned on your short option, you will be short stock and you will have to pay the dividend to the shareholder of your short stock. So if you have a covered call on, and you are assigned, your stock will be called away, and you will have to pay the dividend. "Below I will try to explain two most common Binomial Option Pricing Models (BOPM) used. First of all, BOPM splits time to expiry into N equal sub-periods and assumes that in each period the underlying security price may rise or fall by a known proportion, so the value of an option in any sub-period is a function of its possible values in the following sub period. Therefore the current value of an option is found by working backwards from expiry date through sub-periods to current time. There is not enough information in the question from your textbook so we may assume that what you are asked to do is to find a value of a call option using just a Single Period BOPM. Here are two ways of doing this: First of all let's summarize your information: Current Share Price (Vs) = $70 Strike or exercise price (X) = $60 Risk-free rate (r) = 5.5% or 0.055 Time to maturity (t) = 12 months Downward movement in share price for the period (d) = $65 / $70 = 0.928571429 Upward movement in share price for the period (u) = 1/d = 1/0.928571429 = 1.076923077 ""u"" can be translated to $ multiplying by Vs => 1.076923077 * $70 = $75.38 which is the maximum probable share price in 12 months time. If you need more clarification here - the minimum and maximum future share prices are calculated from stocks past volatility which is a measure of risk. But because your textbook question does not seem to be asking this - you probably don't have to bother too much about it yet. Intrinsic Value: Just in case someone reading this is unclear - the Value of an option on maturity is the difference between the exercise (strike) price and the value of a share at the time of the option maturity. This is also called an intrinsic value.  Note that American Option can be exercised prior to it's maturity in this case the intrinsic value it simply the diference between strike price and the underlying share price at the time of an exercise. But the Value of an option at period 0 (also called option price) is a price you would normally pay in order to buy it. So, say, with a strike of $60 and Share Price of $70 the intrinsic value is $10, whereas if Share Price was $50 the intrinsic value would be $0. The option price or the value of a call option in both cases would be fixed.  So we also need to find intrinsic option values when price falls to the lowest probable and rises to the maximum probable (Vcd and Vcu respectively) (Vcd) = $65-$60 = $5 (remember if Strike was $70 then Vcd would be $0 because nobody would exercise an option that is out of the money) (Vcu) = $75.38-$60 = $15.38 1. Setting up a hedge ratio:  h = Vs*(u-d)/(Vcu-Vcd) h = 70*(1.076923077-0.928571429)/(15.38-5) = 1 That means we have to write (sell) 1 option for each share purchased in order to hedge the risks. You can make a simple calculation to check this, but I'm not going to go into too much detail here as the equestion is not about hedging. Because this position is risk-free in equilibrium it should pay a risk-free rate (5.5%). Then, the formula to price an option (Vc) using the hedging approach is: (Vs-hVc)(e^(rt))=(Vsu-hVcu) Where (Vc) is the value of the call option, (h) is the hedge ratio, (Vs) - Current Share Price, (Vsu) - highest probable share price, (r) - risk-free rate, (t) - time in years, (Vcu) - value of a call option on maturity at the highest probable share price. Therefore solving for (Vc): (70-1*Vc)(e^(0.055*(12/12))) = (75.38-1*15.38) => (70-Vc)*1.056540615 = 60 => 70-Vc = 60/1.056540615 => Vc = 70 - (60/1.056540615)  Which is similar to the formula given in your textbook, so I must assume that using 1+r would be simply a very close approximation of the formula above. Then it is easy to find that Vc = 13.2108911402 ~ $13.21 2. Risk-neutral valuation: Another way to calculate (Vc) is using a risk-neutral approach. We first introduce a variable (p) which is a risk-neutral probability of an increase in share price. p = (e^(r*t)-d)/(u-d) so in your case: p = (1.056540615-0.928571429)/(1.076923077-0.928571429) = 0.862607107 Therefore using (p) the (Vc) would be equal: Vc = [pVcu+(1-p)Vcd]/(e^(rt)) => Vc = [(0.862607107*15.38)+(0.137392893*5)]/1.056540615 => Vc = 13.2071229185 ~ $13.21 As you can see it is very close to the hedging approach. I hope this answers your questions. Also bear in mind that there is much more to the option pricing than this. The most important topics to cover are: Multi-period BOPM Accounting for Dividends Black-Scholes-Merton Option Pricing Model" I do this often with shares that I own - mostly as a learning/experience-building exercise, since I don't own enough individual stocks to make me rich (and don't risk enough to make me broke). Suppose I own 1,000 shares of X.  I don't expect my shares to go down, but I want to be compensated in case they do go down.  Sure, I could put in a stop-loss order, but another option is to sell a call above where the stock is now (out-of-the-money).   So I get the premium regardless of what happens.  From there three things can happen: So a covered call essentially lets you give up some upside for some compensation against downward moves.  Mathematically it's roughly equivalent to selling a put option - you make a little money (from the premium) if the stock goes up but can lose a lot if the stock plummets. So you would sell call options if: Option contracts typically each represent 100 shares. So the 1 call contract you sold to open (wrote) grants the buyer of that option the right to purchase your 100 shares for $80.00 per share any time before the option expiration date. You were paid a gross amount of $100 (100 shares times $1.00 premium per share) for taking on the obligation to deliver should the option holder choose to exercise. You received credit in your account of $89.22, which ought to be the $100 less any trading commission (~$10?) and miscellaneous fees (regulatory, exchange, etc.) per contract. You did capture premium. However, your covered call write represents an open short position that, until either (a) the option expires worthless, or (b) is exercised, or (c) is bought back to close the position, will continue to show on your account as a liability. Until the open position is somehow closed, the value of both the short option contract and long stock will continue to fluctuate. This is normal. "Yeah. This shorting the box nonsense is an extremely expensive way to capture downside. If I just drop $1000 on a long-dated out-of-the-money put I have significantly more downside exposure for much much less than the [100 X $160 - (call premium)]. That's like 16 grand dude!!! It does keep you more delta neutral, but still, stupid way to go about it, especially if you are concerned about ""cheap""." "Even though this isn't really personal finance related I still feel like there are some misconceptions here that could be addressed. I don't know where you got the phrase ""pass-through"" insurance from.  What you're describing is a self-funded plan.  In a self-funded arrangement an employer contracts a third-party-administrator (TPA), usually one of the big health insurance carriers, to use it's provider network, process and adjudicate claims, etc.  In addition to the TPA there will be some sort of stop-loss insurance coverage on each participant.  Stop-loss coverage usually provides a maximum amount of risk on a given member and on the entire population for a given month and/or year and/or lifetime.  The employer's risk is in between the plan deductible and the stop loss coverage (assuming the stop-loss doesn't have a maximum). Almost all of the claim dollars in a given plan will come from very very few people.  These costs typically arise out of very unforeseen diagnoses not chronic issues.  A cancer patient can easily cost $1,000,000 in a year.  Someone's diabetes maintenance medicine or other chronic maintenance will cost no where near what a botched surgery will in a year. If we take a step back there are really four categories of employer insurance. Small group is tightly regulated.  Usually plan premiums are filed with a state authority, there is no negotiating, your group's underwriting performance has zero impact on your premiums.   Employers have no way of obtaining any medical/claim information on employees. Mid-market is a pooled arrangement.  The overall pool has a total increase, and your particular group performs better or worse than the pool which may impact premiums.  Employers get very minor claims data, things like the few highest claims, or number of claims over a certain threshold, but no employee specific information. Large-group is a mostly unpooled arrangement.  Generally your group receives it's own rating based on its individual underwriting performance.  In general the carrier is offloading some risk to a stop-loss carrier and employer's get a fair amount of insight in to claims, though again, not with employee names. Self-funded is obviously self-contained.  The employer sets up a claims checking account.  The TPA has draft authority on the account.  The employee's typically have no idea the plan is self funded, their ID cards will have the carrier logo, and the carrier deals with them just as it would any other member.  Generally when a company is this size it has a separate benefits committee, those few people will have some level of insight in to claims performance and stop-loss activity.  This committee will have nothing to do with the hiring process. There are some new partially self-funded arrangements, which is just a really low-threshold  (and relatively expensive) stop-loss program, that's becoming somewhat popular in the mid-market group size as employers attempt to reduce medical spend.   I think when you start thinking on a micro, single employee level, you really lose sight of the big picture.  Why would an employer hire this guy who has this disease/chronic problem that costs $50,000 per year?  And logically you can get to the conclusion that with a self-funded plan it literally costs the company the money so the company has an incentive not to hire the person.  I understand the logic of the argument, but at the self funded level the plan is typically costing north of half a million dollars each month.  So a mid-level HR hiring manager 1. isn't aware of specific plan claims or costs and is not part of the benefits executive committee, 2. won't be instructed to screen for health deficiencies because it's against the law, 3. a company generally won't test the water here because $50,000 per year is less than 1% of the company's annual medical expenses, 4. $50,000 is well below the cost to litigate a discrimination law-suit.    Really the flaw in your thought process is that $50,000 in annual medical expense is a lot.  A harsh child-birth can run in the $250,000 range, so these companies never hire women?  Or never hire men who could add a spouse who's in child bearing years?  Or never hire women who might have a female spouse who could be in child bearing years?  A leukemia diagnosis will ratchet up $1,000,000 in a year.  Spend a bit of time in intensive care for $25,000 per day and you're fired?  A few thousand bucks on diabetes meds isn't anything relative to the annual cost of your average self-funded plan. The second flaw is that the hiring managers get insight in to specific claims.  They don't. Third, you don't hand over medical records on your resume anyway. I typed this out in one single draft and have no intention of editing anything.  I just wanted paint a broad picture, I'm sure things can be nit-picked or focused on." They can sell a lower price call if they expect the stock to plummet in the near term but they are bullish on the longer term. What they are looking to do is collect the call premium and hope it expires worthless.  And then again 'hope' that the stock will ultimately turn around. So yes, a lot of hoping.  But can you explain what you mean by 'my brokerage gives premiums for prices lower than the current price'? Do you mean you pay less in commissions for ITM calls?