258 Part Ill: Put Option Strategies 
chase can achieve. If the underlying stock remains relatively unchanged, the short 
seller would do better because he does not risk losing his entire investment in a lim­
ited amount of time if the underlying stock changes only slightly in price. However, 
if the underlying stock should rise dramatically, the short seller can actually lose more 
than his initial investment. The short sale of stock has theoretically unlimited risk. 
Such is not true of the put option purchase, whereby the risk is limited to the amount 
of the initial investment. One other point should be made when comparing the pur­
chase of a put and the short sale of stock: The short seller of stock is obligated to pay 
the dividends on the stock, but the put option holder has no such obligation. This is 
an additional advantage to the holder of the put. 
TABLE 16-2. 
Results of selling short. 
XYZ Price at Put Option 
Expiration Short Sale Purchase 
20 + $3,000 (+ 120%) +$2,500 (+ 500%) 
30 + 2,000 (+ 80%) + 1,500 (+ 300%) 
40 + 1,000 (+ 40%) + 500 (+ 100%) 
45 + 500(+ 20%) 0( 0%) 
48 + 200(+ 80%) 300 (- 60%) 
50 0( 0%) 500 (- 100%) 
60 - 1,000 (- 40%) 500 (- 100%) 
75 - 2,500 (- 100%) 500 (- 100%) 
100 - 5,000 (- 200%) 500 (- 100%) 
SELECTING WHICH PUT TO BUY 
Many of the same types of analyses that the call buyer goes through in deciding which 
call to buy can be used by the prospective put buyer as well. First, when approach­
ing put buying as a speculative strategy, one should not place more than 15% of his 
risk capital in the strategy. Some investors participate in put buying to add some 
amount of downside protection to their basically bullishly-oriented common stock 
portfolios. More is said in Chapter 17 about buying puts on stocks that one actually 
owns. 
The out-ofthe-nwney put offers both higher reward potentials and higher risk 
potentials than does the in-the-nwney put. If the underlying stock drops substantial-