If you sell an option on the stock at the same time you buy it, and also place a stop order, your potential loss will be even lower. IF THE STOCK GOES DOWN LESS THAN THE AMOUNT YOU RECEIVE FOR THE OPTION, YOU WILL ACTUALLY MAKE MONEY! For example, if you buy 100 shares of ABC for $50 a share and sell an option for $2.50 a share with an exercise price of $55, and an expiration date 60 days out, if the stock goes down to $45, you will lose $2.50 per share ($50 stock -$2.50 option = $47.50 net cost per share). BUT if you just buy the stock and hold on, you will lose $5 a share, or twice as much as you would have lost if you had sold the option. And if the stock only goes down $2.50, you won't lose anything!
Arizona Financial Software has designed a program to help you write, analyze, and track the writing of covered call options. This program describes a very conservative use of options because it deals with options in a covered call strategy.