"Naked" Puts: An Alternative To Covered Calls - Part Two
...continued from Part One
Looking For Alternatives
Because the net time premiums of calls and puts with the same stock,strike and expiration can be very close, it often happens that if weare recommending a particular call for covered writing, we are alsorecommending the corresponding put for "naked" put writing as well.
Not a long time ago, we were recommending 341 covered calls and "naked"short puts that had the same stock, strike price and expiration.
Leverage And Diversification
Writing uncovered short puts can also allow the investor greaterleverage and diversification. This is because you can write can write agreater number of puts using margin.
At present the exchange minimummargin on a "naked" short option is the greater of:
- 20% of the underlying minus the amount the stock is out-of-the-money; or,
- 10% of the underlying.
One way to help modify this risk is to buy index options to hedge a portfolio of "naked" put writes.
CLICK HERE FOR THE FULL-SIZED TABLE
In Table 2, we have selected six recommended put writes for a totalmargin cost of $12,583 versus about $60,000 that it would take toestablish the same positions as covered calls.
In our example, we havebeen able to cover some of the risk of these positions by buying indexoptions that will produce a partial offset if the market declines.
Note: another way to cover the risk of a short put is to buy a lowerstrike put as well. This creates a spread known as a bull put spread.
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