300 Part Ill: Put Option Strategies 
takes a nasty fall, and (2) collateral requirements are small, so it is possible to utilize 
a great deal of leverage. It may seem like a good idea to write out-of-the-money puts 
on "quality" stocks that you "wouldn't mind owning." However, any stock is subject 
to a crushing decline. In almost any year there are serious declines in one or more of 
the largest stocks in America (IBM in 1991, Procter and Gamble in 1999, and Xerox 
in 1999, just to name a few). If one happens to be short puts on such stocks - and 
worse yet, ifhe happens to have overextended himself because he had the initial mar­
gin required to sell a great deal of puts - then he could actually be wiped out on such 
a decline. Therefore, do not leverage your account heavily in the naked put strategy, 
regardless of the "quality" of the underlying stock. 
THE COVERED PUT SALE 
By definition, a put sale is covered only if the investor also owns a corresponding put 
with striking price equal to or greater than the strike of the written put. This is a 
spread. However,formargin purposes, one is covered ifhe sells a put and is also short 
the underlying stock. The margin required is strictly that for the short sale of the 
stock; there is none required for the short put. This creates a position with limited 
profit potential that is obtained if the underlying stock is anywhere below the strik­
ing price of the put at expiration. There is unlimited upside risk, since if the under­
lying stock rises, the short sale of stock will accrue losses, while the profit from the 
put sale is limited. This is really a position equivalent to a naked call write, except that 
the covered put writer must pay out the dividend on the underlying stock, if one 
exists. The naked sale of a call also has an advantage over this strategy in that com­
mission costs are considerably smaller. In addition, the time value premium of a call 
is generally higher than that of a put, so that the naked call writer is taking in more 
time premium. The covered put sale is a little-used strategy that appears to be infe­
rior to naked call writing. As a result, the strategy is not described more fully. 
RATIO PUT WRITING 
A ratio put write involves the short sale of the underlying stock plus the sale of 2 puts 
for each 100 shares sold short. This strategy has a profit graph exactly like that of a 
ratio call write, achieving its maximum profit at the striking price of the written 
options, and having large potential losses if the underlying stock should move too far 
in either direction. The ratio call write is a highly superior strategy, however, for the 
reasons just outlined. The ratio call writer receives dividends while the ratio put