Put options on stocks are derivative contracts that increase in value if the stock price goes down. You may want to buy puts to protect your stock investments against a bear market or just because you believe a particular stock is due for a fall. All puts have an expiration date, and if the underlying stock has not dropped below a pre-set price by that date, the put expires and is worthless.
Stock Puts at Work
One put contract gives you the right to sell 100 shares of the underlying stock for a specific price -- called the strike price. Puts can be bought across a range of strike prices and with a handful of expiration dates. If the stock price is below the strike price before or at the expiration date, the put will have intrinsic value -- value you can lock up for your account by selling the put or exercising the option to sell the stock if you own the shares. The trader on the other side of a put purchase -- the seller -- gets the cost of the put as income but is on the hook to buy the shares if the buyer chooses to exercise.
Option Expiration Dates
Option contracts come with an expiration month. The actual expiration date is the third Friday of the listed expiration month. A stock will have put and call options with four regular expirations. Included in the four will be the current month, the next month and two months on one of three possible quarterly cycles such as January, April, July and October. These standard option cycles allow a maximum of nine months to the most distant expiration date.
LEAPing Long-Term Options
In 1990, the Chicago Board Options Exchange added longer term options with the dubious acronym, Long-term Equity AnticiPation Securities -- LEAPS. The expiration for a LEAPS put can be up to 39 months in the future. However, LEAPS only expire in January, so for most of the year, the most distant expiration for a LEAPS put option is January two years in the future. The options listings for a stock on one of the major financial websites will show the longest term put. Look for the January expirations.
In March 2012, the CBOE started offering "Super LEAPS" with expiration dates up to five years in the future. The new, extra-long term puts and calls are only available for S&P 500 stock index options and not on individual stocks. The S&P 500 super LEAPS have December expiration dates. Super LEAPS puts on the S&P 500 could be used to protect a portfolio of stocks against an overall market decline.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.