There's no doubt that if you've been trading options any length of time and you continue to bone up on the ins and outs of options that you've come across the analogy of the insurance company.  The idea or argument proposed by those who favor selling options is that the people who make money are those selling premium, not buying it.  Just look at insurance companies ... they're massive institutions that make money hand over fist in the form of premiums.  They spread that risk so that they have virtually no way of getting called all at once.  Now apply that to your option trading skills.  Diversify your option selling across multiple products, multiple strikes, etc and you'll turn out a winner.  Makes perfect sense, right?

Enter reality.  Let's look at the world's biggest insurer in AIG.  They apparently need more money and it has not been determined what their concreet exposure is. (see Bailout Fund Needs Money).  The bottom line is that you're trading risk for premium, just like an insurance company.  AIG and others have apparently overlooked that.  There really isn't a way to perfectly hedge exposure and the more positions you have on, the more impossible it becomes.  The best way to keep your risk manageable is to consider assignment for every option.  Never mind the fancy margin calculators.  Can you cover it?  Can you accept the loss?  Can your spouse accept the loss?

As you know, I sell options.  I also enter spreads to build in a hedge (at the expense of profit).  These tools are extremely useful and flexible.  However, they also give you enough rope to shoot yourself in the foot.  It can happen to the big boys and it can happen to you.