298 Part Ill: Put Option Strategies 
Example: XYZ is 48 and the XYZ January 50 put is selling for 5 points. The profit 
that could be made if the stock were unchanged at expiration would be only 3 points, 
less commissions, since the put would have to be repurchased for 2 points with XYZ 
at 48 at expiration. Commissions for the buy-back should be included as well, to 
make the computation as accurate as possible. 
As was the case with covered call writing, one can create several rankings of 
naked put writes. One list might be the highest potential returns. Another list could 
be the put writes that provide the rrwst downside protection; that is, the ones that 
have the least chance of losing money. Both lists need some screening applied to 
them, however. When considering the maximum potential returns, one should take 
care to ensure at least some room for downside movement. 
Example: If XYZ were at 50, the XYZ January 100 put would be selling at 50 also and 
would most assuredly have a tremendously large maximum potential return. 
However, there is no room for downside movement at all, and one would surely not 
write such a put. One simple way of allowing for such cases would be to reject any 
put that did not offer at least 5% downside protection. Alternatively, one could also 
reject situations in which the return if unchanged is below 5%. 
The other list, involving maximum downside protection, also must have some 
screens applied to it. 
Example: With XYZ at 70, the XYZ January 50 put would be selling for½ at most. 
Thus, it is extremely unlikely that one would lose money in this situation; the stock 
would have to fall 20 points for a loss to occur. However, there is practically nothing 
to be made from this position, and one would most likely not ever write such a deeply 
out-of-the-money put. 
A minimum acceptable level of return must accompany the items on this list of 
put writes. For example, one might decide that the return would have to be at least 
12% on an annualized basis in order for the put write to be on the list of positions 
offering the most downside protection. Such a requirement would preclude an 
extreme situation like that shown above. Once these screens have been applied, the 
lists can then be ranked in a normal manner. The put writes offering the highest 
returns would be at the top of the more aggressive list, and those offering the high­
est percentage of downside protection would be at the top of the more conservative 
list. In the strictest sense, a more advanced technique to incorporate the volatility of 
the underlying stock should rightfully be employed. As mentioned previously, that 
technique is presented in Chapter 28 on mathematical applications.