Covered Call Risks

Covered calls are considered safe, but they're not risk-free. Here are the risks and how to manage them.

Risk 1: Opportunity Cost

What it is: Missing out on gains above your strike price

Example: You sell a $150 call on NVDA, stock goes to $180. You miss $30/share of gains.

How to manage:

  • Choose higher strikes (further OTM)
  • Accept some missed upside for premium income
  • Roll up and out if stock approaches strike

    • Risk 2: Stock Decline

    What it is: The stock drops and you lose money on shares

    Reality: This is stock ownership risk, not covered call risk. The premium actually reduces your loss.

    How to manage:

  • Only sell covered calls on stocks you want to own
  • Premium provides partial downside buffer
  • Don't hold stocks just for covered call income

    • Risk 3: Assignment

    What it is: Your shares are called away, possibly at an inopportune time

    How to manage:

  • Set strikes at prices you'd happily sell
  • Roll before expiration if you want to keep shares
  • Plan for tax implications

    • Risk 4: Dividend Risk

    What it is: Early assignment before ex-dividend date

    How to manage:

  • Be aware of ex-dividend dates
  • Close ITM calls before ex-date
  • Factor dividend into your analysis