296 Part Ill: Put Option Strategies 
other available put writing positions before deciding to write another put on the sam<' 
underlying stock. His commission costs are the same if he remains in XYZ stock or if 
he goes on to a put writing position in a different stock. 
EVALUATING A NAKED PUT WRITE 
The computation of potential returns from a naked put write is not as straightforward 
as were the computations for covered call writing. The reason for this is that the col­
lateral requirement changes as the stock moves up or down, since any naked option 
position is marked to the market. The most conservative approach is to allow enough 
collateral in the position in case the underlying stock should fall, thus increasing the 
requirement. In this way, the naked put writer would not be forced to prematurely 
close a position because he cannot maintain the margin required. 
Example: XYZ is at 50 and the October 50 put is selling for 4 points. The initial col­
lateral requirement is 20% of 50 plus $400, or $1,400. There is no additional require­
ment, since the stock is exactly at the striking price of the put. Furthermore, let us 
assume that the writer is going to close the position should the underlying stock fall 
to 43. To maintain his put write, he should therefore allow enough margin to collat­
eralize the position if the stock were at 43. The requirement at that stock price would 
be $1,560 (20% of 43 plus at least 7 points for the in-the-money amount). Thus, the 
put writer who is establishing this position should allow $1,560 of collateral value for 
each put written. Of course, this collateral requirement can be reduced by the 
amount of the proceeds received from the put sale, $400 per put less commissions in 
this example. If we assume that the writer sells 5 puts, his gross premium inflow 
would be $2,000 and his commission expense would be about $75, for a net premi­
um of $1,925. 
Once this information has been determined, it is a simple matter to determine 
the maximum potential return and also the downside break-even point. To achieve 
the maximum potential return, the put would expire worthless with the underlying 
stock above the striking price. Therefore, the maximum potential profit is equal to 
the net premium received. The return is merely that profit divided by the collateral 
used. In the example above, the maximum potential profit is $1,925. The collateral 
required is $1,560 per put (allowing for the stock to drop to 43) or $7,800 for 5 puts, 
reduced by the $1,925 premium received, for a total requirement of $5,875. The 
potential return is then $1,925 divided by $5,875, or 32.8%. Table 19-2 summarizes 
these calculations.