What are some ways to mitigate the risks of covered calls?
When covered calls work, they seem great. However, there is a chance that the stock will tank, turning the 5% profit into a 50% loss.
What are some ways of mitigating the risk of a stock dropping when writing covered calls?
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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.
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.
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