oops I forgot..One other thing… PUT options are very useful if you have a lot of company stock options that you want to hedge against.
For example, back in the heyday, I worked for a company that gave us $30/share options. When the stock hit about $250/share, I was still unvested, so I couldn’t cash out the company issued stock options. What I did was when the market price was $250/share, I bought the equivalant number of PUT contracts at a strike price of something lower (say $200/share) that expired 1-2 months out.
The reason being is because 1) a sell price of $50 less than current market plus a short expiration window meant the cost of the option wasn’t that much. 2) It offered some downward protection in case my company stock declined while I was still waiting to vest. I had to keep buying put options every few months, until i vested for a year, because for the first year, my company did well and the stock held pretty well, so my PUT options kept expiring worthless. But the few thousand dollars lost to expired PUT options was trivial relative the the options worth of the one issued by the company. Finally at the end of the first year, I exercised and sold my vested stock options for the first year at about $226/share, and continued to buy PUTs for the unvested portion the second year to hedge against the remaining unvested portion.
The second year i was there, my company’s stock cratered from $200ish down to $17, my company options were worthless, but my PUT options did just fine. (On top of that my company reissued stock options at $17 which over the next two years eventually cratered to $7).
Please note though, It’s not worth to do this if you are only issued a few company options (1000-2000) or the strike price of the companhy issued options are too close to the fmv of the current stock price, as the cost of the PUT options you buy will strip any profits you make from your company issued options. And you shouldn’t be gambling that your company will do bad. Afterall, if you know that, you shouldn’t be working there.
Also, some companies have strict company policies that says employees should NOT engage in trading derivatives of the company, though unless you’re a director/officer of the company or have insider data, it’s just a company policy, not a SEC policy. The workaround is to find a distant relative/trusted friend to buy the PUT options as a hedge against their own stock options. Also, you definitely shouldn’t do this regardless of what company policy there is if you’re a company officer,director, or have insider data….Chances are you will breach some SEC rule, and you don’t want to get a call from them.
