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