396 Part Ill: Put Option Strategies 
In summary, this is a position with tremendous, even dangerous, leverage. 
In-the-Money Covered Call Write. The situation is slightly different if the 
option is in-the-money to begin with. The above margin requirements actually don't 
quite accurately state the case for a margined covered call write. When a covered call 
is written against the stock, there is a catch: Only 50% of the stock price or the strike 
price, whichever is less, is available for "release." Thus, one will actually be required 
to put up more than 50% of the stock price to begin with. 
Example: XYZ is trading at 50, and there is a 2-year LEAPS call with a strike price 
of 30, selling for 25 points. One might think that the requirement for a covered call 
write would be zero, since the call sells for 50% of the stock price. But that's not the 
case with in-the-money covered calls. 
Margin requirement: 
Buy stock: 50 points 
Less option proceeds -25 
Less margin release* -15* 
Net requirement: 10 points 
* 50% of the strike price or 50% of stock price, whichever is less. 
This position still has a lot ofleverage: One invests 10 points in hopes of making 5, if 
the stock is called away at 30. One also would have to pay interest on the 15-point 
debit balance, of course, for the two-year duration of the position. Furthermore, 
should the stock fall below the strike price, the broker would begin to require main­
tenance margin. 
Note that the above "formula" for the net requirement works equally well for 
the out-of-the-money covered call write, since 50% of the stock price is always less 
than 50% of the strike price in that case. 
To summarize this "free ride" strategy: If one should decide to use this strate­
gy, he must be extremely aware of the dangers of high leverage. One must not risk 
more money than he can afford to lose, regardless of how small the initial investment 
might be. Also, he must plan for some method of being able to make the margin pay­
ments along the way. Finally, the in-the-money alternative is probably better, because 
there is less probability that maintenance margin will be asked for. 
SELLING UNCOVERED LEAPS 
Uncovered option selling can be a viable strategy, especially if premiums are over­
priced. LEAPS options may be sold uncovered with the same margin requirements 
as short-term options. Of course, the particular characteristics of the long-term 
option may either help or hinder the uncovered writer, depending on his objective.