19: The Sale of a Put 299 
YING STOCK BELOW ITS MARKET PRICE 
addition to viewing naked put writing as a strategy unto itself, as was the case in 
previous discussion, some investors who actually want to acquire stock will often 
te naked puts as well. 
bmple: XYZ is a $60 stock and an investor feels it would be a good buy at 55. He 
places an open buy order with a limit of 55. Three months later, XYZ has drifted 
down to 57 but no lower. It then turns and rises heavily, but the buy limit was never 
reached, and the investor misses out on the advance. 
This hypothetical investor could have used a naked put to his advantage. 
Suppose that when XYZ was originally at 60, this investor wrote a naked three-month 
put for 5 points instead of placing an open buy limit order. Then, if XYZ is anywhere 
below 60 at expiration, he will have stock put to him at 60. That is, he will have to buy 
stock at 60. However, since he received 5 points for the put sale, his net cost for the 
stock is 55. Thus, even ifXYZ is at 57 at expiration and has never been any lower, the 
investor can still buy XYZ for a net cost of 55. 
Of course, if XYZ rose right away and was above 60 at expiration, the put would 
not be assigned and the investor would not own XYZ. However, he would still have 
made $500 from selling the put, which is now worthless. The put writer thus assumes 
a more active role in his investments by acting rather than waiting. He receives at 
least some compensation for his efforts, even though he did not get to buy the stock. 
If, instead of rising, XYZ fell considerably, say to 40 by expiration, the investor 
would be forced to purchase stock at a net cost of 55, thereby giving himself an 
immediate paper loss. He was, however, going to buy stock at 55 in any case, so the 
put writer and the investor using a buy limit have the same result in this case. Critics 
may point out that any buy order for common stock may be canceled if one's opinion 
changes about purchasing the stock. The put writer, of course, may do the same thing 
by closing out his obligation through a closing purchase of the put. 
This technique is useful to many types of investors who are oriented toward 
eventually owning the stock. Large portfolio managers as well as individual investors 
may find the sale of puts useful for this purpose. It is a method of attempting to accu­
mulate a stock position at prices lower than today's market price. If the stock rises 
and the stock is not bought, the investor will at least have received the put premium 
as compensation for his efforts. 
SOME CAUTION IS REQUIRED 
Despite the seemingly benign nature of naked put writing, it can be a highly dan­
gerous strategy for two reasons: (1) Large losses are possible if the underlying stock