While there are similarities between covered calls and naked puts in terms of investment strategy, the two techniques do have some significant differences and they differ greatly when it comes to risk. This segment will outline the differences between these two approaches.
NAKED PUTS CANNOT BE USED IN AN IRA ACCOUNT
One of the unique advantages to writing covered calls is that it is the only option strategy that can be used in an IRA account. This means that the investor can produce gains “on top of” gains, without the burden of yearly capital gains tax. By doing so, investors are able to use the money that they would normally have to pay in capital gains tax each year to produce further gains. Naked puts cannot be used in an IRA account, and therefore do not share the same tax benefit as covered call writing.
NAKED PUTS INVOLVE MORE RISK FOR YOUR BROKER
When selling a naked put you do not own the underlying stock, and you are selling someone the right to sell YOU their stock at a given price. This commitment essentially means that your broker is extending you credit on your account. Unless you have the full amount of cash in your account to buy the shares that you have agreed to potentially purchase, your broker is extending credit. Since one of the real benefits of selling naked puts is the fact that you can use leverage and do not need to have that amount of cash in your account, you will need special permission from your broker in order to implement these trades.
The fact that your broker has special account requirements for this type of transaction, coupled with the fact that you need special permission, should provide investors immediate insight into the type of risk associated with naked puts. The option requirements for this type of trade are “Level 3,” which is the highest of all option permission requirements.
SELLERS OF NAKED PUTS RUN THE RISK OF OVER-LEVERAGING THEMSELVES
Since the amount of money required in your account for selling naked puts is less than what is required for writing covered calls, investors run the risk of over-leveraging themselves. This is a common trap for this type of investment, because the amount of cash required in your account only needs to be about 30% of what is actually required should you need to purchase the stock. This means that if you sell three naked puts and are required to buy the stock for all three transactions, you may only have enough cash to pay for the stock on ONE of these trades. Therefore, you will have to supply more additional funds to your broker, or your broker will sell some of your other stock. This requirement can be the cause of trouble for many investors. Another way to think of it is that you have agreed to buy more stock than what you have the cash to buy.
NAKED PUTS ARE A “BULL-TO-BEAR” TRANSACTION
On Wall Street, the “Bulls” are those expecting the market or an individual stock to go up, and the “Bears” are those expecting the market or a stock to go down. It is often said that for every trade on the stock market there is a “bull” as the buyer and a “bear” as the seller. The reasoning behind the belief is that if you think the stock is going higher you would not sell, and if you think it is going lower you would not buy. Only those that believe the stock will probably go lower will sell, therefore the seller is always bearish on the stock. Conversely, only those that believe the stock will go up will buy a stock, therefore the buyer is always bullish.
When you write a covered call, the transaction is unique in the fact that you have a “bull-to-bull” transaction instead of a “bull-to-bear” transaction. The reason for this is that when you sell the call you are hoping and expecting the stock price to maintain its’ current price or move higher. The buyer of the call is even more bullish on the stock, expecting the stock price to increase significantly so that he or she has become profitable. (If th
Calls vs. Puts 
