CH.APTER 19 
The Sale of a Put 
The buyer of a put stands to profit if the underlying stock drops in price. As might 
then be expected, the seller of a put will make money if the underlying stock increas­
es in price. The uncovered sale of a put is a more common strategy than the covered 
sale of a put, and is therefore described first. It is a bullishly-oriented strategy. 
THE UNCOVERED PUT SALE 
Since the buyer of a put has a right to sell stock at the striking price, the writer of a 
put is obligating himself to buy that stock at the striking price. For assuming this obli­
gation, he receives the put option premium. If the underlying stock advances and the 
put expires worthless, the put writer will not be assigned and he could make a maxi­
mum profit equal to the premium received. He has large downside risk, since the 
stock could fall substantially, thereby increasing the value of the written put and caus­
ing large losses to occur. An example will aid in explaining these general statements 
about risk and reward. 
Example: XYZ is at 50 and a 6-month put is selling for 4 points. The naked put writer 
has a fixed potential profit to the upside - $400 in this example and a large poten­
tial loss to the downside (Table 19-1 and Figure 19-1). This downside loss is limited 
only by the fact that a stock cannot go below zero. 
The collateral requirement for writing naked puts is the same as that for writ­
ing naked calls. The requirement is equal to 20% of the current stock price plus the 
put premium minus any out-of-the-money amount. 
Example: If XYZ is at 50, the collateral requirement for writing a 4-point put with a 
striking price of 50 would be $1,000 (20% of 5,000) plus $400 for the put premium 
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