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training_data/curated/text/1d4f3b695c69b0ced54b32fa59d05c16b4198d15a2e85da37c3dd7628c434ae6.txt

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+504 Part V: Index Options and Futures 
+morning before the next trading day begins. Note that he cannot merely exercise his 
+long, since, if he did that, he would then receive the next night's closing price for his 
+long. Under the worst scenario, suppose the market receives disappointing econom­
+ic news the next day and opens sharply lower - with the index at 172. If he sells his 
+long Nov 160 calls at parity ($1,200), he will have paid a debit of $824 - larger than 
+his initial, theoretically "limited" maximum debit of $500. Thus he loses $624 on this 
+spread ( $824 less the initial credit of $200) - over twice the theoretically limited loss 
+of $300. 
+If the market should open sharply lower and trade down, he could lose more 
+money than he thought because his long position is now exposed - there is no longer 
+a spread in place after the short option is assigned. Of course, this could work to his 
+advantage if the market rallied the next day. The point is, however, that a spread in 
+cash-based options acquires more risk than the difference in the strikes (the maxi­
+mum risk in stock options) if the short option in the spread becomes a deeply in-the­
+money option, ripe for assignment. 
+NAKED MARGIN 
+When an index is designated as "broad-based," a lesser margin requirement applies 
+to the writer of naked options. The SEC determines which indices are broad-based. 
+A broad-based index receives more favorable margin treatment because the under­
+lying index will not normally change in price as quickly as a stock or subindex. Thus, 
+the naked writer theoretically has less of a risk with a naked broad-based index 
+option. 
+The requirement for writing a broad-based index option naked is 15% of the 
+index, plus the option premium, minus the amount, if any, that the option is out-of 
+the-money. There is a minimum requirement: for calls, it is 10% of the index value; 
+for puts, it is 10% of the striking price. Both minima are in addition to the option pre­
+mium. 
+Example: Suppose that the ZYX is at 168.00, with a Dec 170 call selling for 6 and a 
+Dec 170 put selling for 5. The requirement for selling the call naked would be cal­
+culated as follows: 
+15% of index 
+Plus call premium 
+Less out-of-money amount 
+Naked call requirement 
+$2,520 
++ 600 
+200 
+$2,920