294 Part Ill: Put Option Strategies 
In either strategy, one needs to be somewhat bullish, or at least neutral, on the 
underlying stock. If the underlying stock moves upward, the uncovered put writer 
will make a profit, possibly the entire amount of the premium received. If the under­
lying stock should be unchanged at expiration - a neutral situation - the put writer 
will profit by the amount of the time value premium received when he initially wrote 
the put. This could represent the maximum profit if the put was out-of-the-money 
initially, since that would mean that the entire put premium was composed of time 
value premium. For an in-the-money put, however, the time value premium would 
represent something less than the entire value of the option. These are similar qual­
ities to those inherent in covered call writing. If the stock moves up, the covered call 
writer can make his maximum profit. However, if the stock is unchanged at expira­
tion, he will make his maximum profit only if the stock is above the call's striking 
price. So, in either strategy, if the position is established with the stock above the 
striking price, there is a greater probability of achieving the maximum profit. This 
represents the less aggressive application: writing an out-of-the-money put initially, 
which is equivalent to the covered write of an in-the-money call. 
The more aggressive application of naked put writing is to write an in-the­
money put initially. The writer will receive a larger amount of premium dollars for 
the in-the-money put and, if the underlying stock advances far enough, he will thus 
make a large profit. By increasing his profit potential in this manner, he assumes 
more risk. If the underlying stock should fall, the in-the-money put writer will lose 
money more quickly than one who initially wrote an out-of-the-money put. Again, 
these facts were demonstrated much earlier with covered call writing. An in-the­
money covered call write affords more downside protection but less profit potential 
than does an out-of-the-money covered call write. 
It is fairly easy to summarize all of this by noting that in either the naked put 
writing strategy or the covered call writing strategy, a less aggressive position is estab­
lished when the stock is higher than the striking price of the written option. If the 
stock is below the striking price initially, a more aggressive position is created. 
There are, of course, some basic differences between covered call writing and 
naked put writing. First, the naked put write will generally require a smaller invest­
ment, since one is only collateralizing 20% of the stock price plus the put premium, 
as opposed to 50% for the covered call write on margin. Also, the naked put writer is 
not actually investing cash; collateral is used, so he may finance his naked put writing 
through the value of his present portfolio, whether it be stocks, bonds, or government 
securities. However, any losses would create a debit and might therefore cause him 
to disturb a portion of this portfolio. It should be pointed out that one can, ifhe wish­
es, write naked puts in a cash account by depositing cash or cash equivalents equal to 
the striking price of the put. This is called "cash-based put writing." The covered call