136 Part II: Call Option Strategies 
trading experience before the account can be approved for naked call writing. In 
addition, some brokers require that a maintenance requirement be applied against 
each option written naked. This requirement, sometimes called a kicker, is usually 
less than $250 per call and is generally used by the broker to ensure that, should the 
customer fail to respond to an assignment notice against his naked call, the commis­
sion costs for buying and selling the underlying stock would be defrayed. 
Naked Option Positions Are Marked to the Market Daily. This 
means that the collateral requirement for the position is recomputed daily, just as in 
the short sale of stock. The same margin formula that was described above is applied 
and, if the stock has risen far enough, the customer will be required to deposit addi­
tional collateral or close the position. The need for such a mark to market is obvious. 
If the underlying stock should rise, the brokerage firm must ensure that the customer 
has enough collateral to cover the eventuality of buying the stock in the open market 
and selling it at the striking price if an assignment notice should be received against 
the naked call. The mark to market works to the customer's favor if the stock falls in 
price. Excess collateral is then released back into the customer's margin account, and 
may be used for other purposes. 
It is important to realize that, in order to write a naked call, collateral is all that 
is required. No cash need be "invested" if one owns securities with sufficient collat­
eral loan value. 
Example: An investor owns 100 shares of a stock selling at $60 per share. This stock 
is worth $6,000. If the loan rate on stock is 50% of $6,000, this investor has a collat­
eral loan value equal to 50% of $6,000, or $3,000. This investor could write any of the 
naked calls in Table 5-2 without adding cash or securities to his account. Moreover, 
he would have satisfied a minimum equity requirement of at least $6,000, since his 
stock is equity. 
This aspect of naked call writing - using collateral value to finance the writing 
- is attractive to many investors, since one is able to write calls and bring in premi­
ums without disturbing his existing portfolio. Of course, if the stock underlying the 
naked call should rise too far in price, additional collateral may be called for by the 
broker because of the mark to market. Moreover, there is risk whether cash or col­
lateral is used. If one buys in a naked call at a loss, he will then be spending cash, cre­
ating a debit in his account. 
Regardless of how one finances a naked option position, it is generally a good 
idea to allow enough collateral so that the stock can move all the way to the point at 
which one would cover the option or take follow-up action. For example, suppose a