Cltapter 17: Put Buying in Conjunction with Common Stock Ownership 
TABLE 17-3. 
Highest Call Strike That Pays for an At-the-Money Put 
(Assuming 2.5 years to expiration) 
Volatility Coll Strike 
30% 
40% 
50% 
70% 
100% 
of Underlying 
30% out of money 
35% out of money 
40% out of money 
50% out of money 
70% out of money 
279 
same price as a three-year call struck at 200! That may seem illogical, but the figures 
can be checked out with the aid of an option-pricing model. Thus, this company was 
able to hedge all of its CSCO stock, with no downside risk ( the striking price of the 
puts was the same as the current stock price) and still had profit potential of over 50% 
to the upside over the next three years. 
Thus, one should consider using LEAPS options when he establishes a collar -
even ifhe is not an institutional trader - because the striking price of the calls can be 
quite high in comparison to that of the put' s strike or in comparison to the price of 
the underlying stock. Table 17-3 shows how far out-of-the-money a written call could 
be that still covers the cost of buying an at-the-money put. The time to expiration in 
this table is 2.5 years - the longest term listed option that currently exists as a LEAPS 
option. 
USING LOWER STRIKES AS A PARTIAL COVERED WRITE 
It should also be pointed out that one does not necessarily have to forsake all of 
the profit potential from his stock. He might buy the puts, as usual, and then sell calls 
with a somewhat lower strike than needed for a low-cost collar, but the quantity of 
calls sold would be less than that of stock owned. In that way, there would be unlim­
ited profit potential on some of the shares of the underlying stock. 
Example: Suppose that the following prices exist: 
XYZ:61 
Apr 55 put: 1 
Apr 65 call: 2 
Furthermore, suppose that one owns 1000 shares of XYZ. Thus, the purchase 
of 10 Apr 55 puts at 1 point apiece would protect the downside. In order to cover the 
cost of those puts ($1000), one need only sell five of the Apr 65 calls at 2 points