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+296 Part Ill: Put Option Strategies 
+other available put writing positions before deciding to write another put on the sam<' 
+underlying stock. His commission costs are the same if he remains in XYZ stock or if 
+he goes on to a put writing position in a different stock. 
+EVALUATING A NAKED PUT WRITE 
+The computation of potential returns from a naked put write is not as straightforward 
+as were the computations for covered call writing. The reason for this is that the col­
+lateral requirement changes as the stock moves up or down, since any naked option 
+position is marked to the market. The most conservative approach is to allow enough 
+collateral in the position in case the underlying stock should fall, thus increasing the 
+requirement. In this way, the naked put writer would not be forced to prematurely 
+close a position because he cannot maintain the margin required. 
+Example: XYZ is at 50 and the October 50 put is selling for 4 points. The initial col­
+lateral requirement is 20% of 50 plus $400, or $1,400. There is no additional require­
+ment, since the stock is exactly at the striking price of the put. Furthermore, let us 
+assume that the writer is going to close the position should the underlying stock fall 
+to 43. To maintain his put write, he should therefore allow enough margin to collat­
+eralize the position if the stock were at 43. The requirement at that stock price would 
+be $1,560 (20% of 43 plus at least 7 points for the in-the-money amount). Thus, the 
+put writer who is establishing this position should allow $1,560 of collateral value for 
+each put written. Of course, this collateral requirement can be reduced by the 
+amount of the proceeds received from the put sale, $400 per put less commissions in 
+this example. If we assume that the writer sells 5 puts, his gross premium inflow 
+would be $2,000 and his commission expense would be about $75, for a net premi­
+um of $1,925. 
+Once this information has been determined, it is a simple matter to determine 
+the maximum potential return and also the downside break-even point. To achieve 
+the maximum potential return, the put would expire worthless with the underlying 
+stock above the striking price. Therefore, the maximum potential profit is equal to 
+the net premium received. The return is merely that profit divided by the collateral 
+used. In the example above, the maximum potential profit is $1,925. The collateral 
+required is $1,560 per put (allowing for the stock to drop to 43) or $7,800 for 5 puts, 
+reduced by the $1,925 premium received, for a total requirement of $5,875. The 
+potential return is then $1,925 divided by $5,875, or 32.8%. Table 19-2 summarizes 
+these calculations.