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