Cl,apter 5: Naked Call Writing 135 
make a 5-point profit there. Above 45, the naked write does better; it has larger prof­
its and smaller losses. Below 45, the short sale does better, and the farther the stock 
falls, the better the short sale becomes in comparison. As will be seen later, one can 
more closely simulate a short sale by writing an in-the-money naked call. 
INVESTMENT REQUIRED 
The margin requirements for writing a naked call are 20% of the stock price plus the 
call premium, less the amount by which the stock is below the striking price. If the 
stock is below the striking price, the differential is subtracted from the requirement. 
However, a minimum of 10% of the stock price is required for each call, even if the 
C-'Omputation results in a smaller number. Table 5-2 gives four examples of how the ini­
tial margin requirement would be computed for four different stock prices. The 20% 
collateral figure is the minimum exchange requirement and may vary somewhat among 
different brokerage houses. The call premium may be applied against the requirement. 
In the first line of Table 5-2, if the XYZ July 50 call were selling for 7 points, the $700 
call premium could be applied against the $1,800 margin requirement, reducing the 
actual amount that the investor would have to put up as collateral to $1,100. 
TABLE 5-2. 
Initial collateral requirements for four stock prices. 
Coll 
Written 
XYZ July 50 
XYZ July 50 
XYZ July 50 
XYZ July 50 
Stock Price When 
Coll Written 
55 
50 
46 
40 
*Requirement cannot be less than 10%. 
Coll 
Price 
$700 
400 
200 
100 
20% of 
Stock Price 
$1,100 
1,000 
920 
800 
Out-of-the­
Money 
Differential 
$ 0 
0 
400 
- 1,000 
Total Margin 
Requirement 
$1,800 
1,400 
720 
400* 
In addition to the basic requirements, a brokerage firm may require that for a 
customer to participate in uncovered writing, he have a minimum equity in his 
account. This equity requirement may range from as low as $2,000 to as high as 
$100,000. Since naked call writing is a high-risk strategy, some brokerage firms 
require that the customer be able to show both financial wherewithal and option