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+Chapter 25: LEAPS 397 
+Uncovered Put Selling. Naked put selling is addressed first because, as a strat­
+egy, it is equivalent to covered writing, and covered writing was just discussed. Two 
+strategies are equivalent if they have the same profit picture at expiration. Naked put 
+selling and covered call writing are equivalent because they have the profit picture 
+depicted in Graph I, Appendix D. Both have limited upside profit potential and large 
+loss exposure to the downside. In general, when two strategies are equivalent, one of 
+the two has certain advantages over the other. 
+In this case, naked put selling is normally the more advantageous of the two 
+because of the way margin requirements are set. One need not actually invest cash 
+in the sale of a naked put; the margin requirement that is asked for may be satisfied 
+with collateral. This means the naked put writer may use stocks, bonds, T-bills, or 
+money market funds as collateral. Moreover, the actual amount of collateral that is 
+required is less than the cash or margin investment required to buy stock and sell a 
+call. This means that one could operate his portfolio normally - buying stock, then 
+selling it and putting the proceeds in a Treasury bill or perhaps buying another stock 
+- without disturbing his naked put position, as long as he maintained the 
+collateral requirement. 
+Consequently, the strategist who is buying stock and selling calls should probably 
+be selling naked puts instead. This does not apply to covered writers who are writing 
+against existing stock or who are using the incremental return concept of covered writ­
+ing, because stock ownership is part of their strategy. However, the strategist who is 
+looking to take in premium to profit if the underlying stock remains relatively 
+unchanged or rises, while having a modicum of downside protection ( which is the 
+definition of both naked put writing and covered writing), should be selling naked 
+puts. As an example of this, consider the LEAPS covered write discussed previously. 
+Example: XYZ is selling at 50. The investor is debating between a 500-share covered 
+write using 2-year LEAPS calls or selling five 2-year LEAPS puts. The January 50 
+LEAPS call sells for 8½ and has two years of life, while the January 50 LEAPS put 
+sells for 3½. Further assume that XYZ pays a dividend of $0.25 per quarter. 
+The net investment required for the covered write is calculated as it was before. 
+Net Investment Required - Covered Write 
+Stock cost (500 shares @ 50) 
+Plus stock commission 
+Less option premiums received 
+Plus option commissions 
+Net cash investment 
++ 
+$25,000 
+300 
+- 4,250 
++ 100 
+$21,150