
GD
100.01
J.C. Penney
JCP
38.20
Pepsico (Pepsi-Cola)
PEP
48.48
Washington Mutual
WM
38.43
Xerox
XRX
14.32
*Closing price as of October 22, 2004
Chapter 1 Setting the Ground Rules
5
Is this a “conservative” portfolio? That is a matter of opinion and alsodepends on the timing of purchase, long-term goals, and the individual’s opinion about the fundamentals for each corporation. These 10stocks provide a cross section of stocks that illustrate where strategieswork well and where they do not work at all. The actual definition of aconservative portfolio is (and should be) ever changing based onchanges in the market, in a stock’s market price and volatility, and ofcourse, in emerging information concerning fundamental strength orweakness of a particular company.Is this information out of date? The data gathered on the closing date—October 22, 2004—is old, but it would be impossible to perpetuallyupdate 10 stocks and still meet the publication date of this book.However, all of the information is relative. The relative values ofoptions for a particular stock will probably be consistent from one period to the next—assuming the proximity between closing price andoption strike price are about the same, and that months to go untilexpiration are the same as well. While these relationships can and dochange based on ever-changing perceptions about a particular company, the data remains valid. We need to use some measurement in time,and all of these stocks were selected and summarized on the same date.Given all of these qualifications, these closing prices (and the optionvalues used in this book) are fair and reasonable. As of that same date,October 22, 2004, there were about 2,500 stocks that had options available to trade—a lot of choices for conservative investors.
6
OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
2OPTION BASICSThe biggest hurdle in the options market is terminology. Thischapter explains the basic concepts and defines option terms;introduces call and put strategies; explains how long and shortpositions work in both types of option contracts; and providesan overview of the options market.
7
T
ypically, books about options start by showing how you can leverage a small amount of capital to make fantastic profits, often inthe triple digits. Such books tend to quickly become overly technical and complex, so that you end up with two problems. First, you areexposed to the proposition that you can get rich by speculating inoptions; second, the discussion becomes obscure as the details emerge.We do not take this approach. Our basic assumption is that, as a conservative investor, you want to know exactly how options might ormight not work in your portfolio, and you want the information to bepresented clearly and logically. Since we concentrate on a fairly narrowrange of possible strategies—only those appropriate in a conservativeportfolio—we can avoid a lot of the more exotic potential of options.Even the most experienced investor struggles with terminology and themeaning of key concepts, so this chapter covers the important mattersthat you need to master, including explanations of calls and puts ineither long or short positions; how option contracts work; expiration ofoptions; strike prices; and time and intrinsic value. In discussing therange of possible strategies, our purpose is not to recommend any particular approach, but to explore and review all of the possibilities. As aconservative investor, you will find only a small portion of these strategies to be of interest; but you can also benefit from knowing about allof the potential uses of calls and puts.
The Workings of Option ContractsIn this section, we review the rules of the option contract. The mechanics of expiration, strike price, and time and intrinsic value affect alldecisions related to how you should or should not employ options andhow risks increase or decrease as you employ a particular strategy.
8
Option Attributes to Determine ValueCollectively, the attributes of the option contract determine its value.This value relates not only to how high or low the premium is, but alsoto how the option has value as a strategic tool in your stock portfolio.Option contracts refer to 100 shares, so each contract allows the buyerto control 100 shares of the underlying stock. Every option relatesspecifically to that one stock and cannot be transferred. The premium isthe cost (to the buyer) or value (to the seller) of the option contract.This cost/value is expressed as the value per 100 shares, usually withoutdollar signs. For example, if an option’s current premium is 6, it isworth $600, and if current premium is 4.75, it is worth $475.Some strategies make options useful for protecting paper profits, maximizing short-term income with little or no market risk, or hedgingother positions. If the option premium is too high (for long-positionstrategies) or too low (for short-position strategies), then a particularoption strategy cannot be justified.Expiration limits the lifetime of the option. The potential profit periodfor the option speculator is the flip side of the advantage the short sellerenjoys. Just as a short seller of stock sells and has an open position, theshort seller is an options trader who initiates a position by selling theoption. The short option position can be closed in one of three ways. Itmay expire worthless, in which case all of the premium received by theseller is profit. It may be closed by buying back at any time, with the difference between the initial sales price and final purchase price representing profit or loss. It may be exercised by the buyer, and the short seller isthen obligated to complete the exercise transaction. When a call is exercised, the seller is required to deliver 100 shares of stock at the strikeprice. When a put is exercised, the seller is required to take delivery of100 shares at the strike price—shares are “assigned” to the seller.
Intrinsic and Time Value PremiumOption premium has two components: intrinsic value and time value.The intrinsic value is equal to the number of points that an option is inthe money. This concept is explained in greater detail later in this chapter; for now, it is important to understand the meaning of intrinsicChapter 2 Option Basics
9
value related to the stock price. The strike price is the price at which anoption can be exercised; for example, if a call option has a strike priceof 45, it means that it provides the buyer the right (but not the requirement) to buy 100 shares at $45 per share. The money rules for thisexample are as follows:1. If a 45 call is held on stock currently valued at $47 per share,the option is 2 points in the money.2. If the stock is valued at $45 per share, there is no intrinsicvalue. This condition—when strike price and stock marketvalue are identical—is called at the money.3. If the stock is valued below the strike price, there is no intrinsicvalue. For example, if the strike price is 45 and the stock is selling at $44 per share, the condition is 1 point out of the money.The opposite direction applies to puts. In-the-money intrinsic valuerefers to the number of points the stock is below the strike price of theoption. For example, if the strike price of a put is 40 and the stock iscurrently selling at $37 per share, the put option contains 3 points ofintrinsic value. If the stock is lower than the call’s strike price or higherthan the put’s strike price, there is no intrinsic value.Time value is the portion of the option premium above and beyondintrinsic value. The longer the time to expiration date, the higher thetime value. So, time value is the key to identifying option strategyopportunities. There is also a relationship between time value premiumand the proximity between strike price of the option and current valueof the underlying stock. A study of option values demonstrates howthis relationship works.
Long-Term Options and Their AdvantagesThe LEAPS (Long-term Equity AnticiPation Security) option is a longterm contract. In comparison, the standard listed option lasts onlyabout 9 months maximum. When various strategies are viewed comparing LEAPS options with listed options, that longer expiration makesa lot of difference to both long and short strategies. There is a far higher time value in a long-term LEAPS option, which may exist for up to
10
OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
36 months. In the stock market, that is a very long time, and everyoneknows that many changes can occur over 3 years. So, if you purchaseoptions, you must expect to pay more for the longer life of the LEAPSoption, because you also buy far greater time. For the short seller, thelonger period translates to higher income, because as a seller, youreceive the premium when you open the short position. For that higherpremium income, you also have to accept a longer exposure period.The expiration and, more specifically, the time between opening anoption position and the expiration date determines the premium valueand affects the decisions made by speculators on the long side andinvestors on the short side.
Strike Price of OptionsStrike price is the second feature that determines the option’s value. Thestrike price is fixed and, in the event of exercise, determines the cost orbenefit to every option position, whether long or short. The proximityof current market value to the strike price of the option also determinescurrent premium value and potential for future gain or loss, as well asthe likelihood of exercise. For example, if a call’s strike price is 30(meaning it would be exercised at $30 per share) and the current market value of the stock is $34, the call is 4 points in the money. It is quitelikely that this option will be exercised in this condition, especially asexpiration approaches. If the stock’s price declines to $28 per share, thecall would be 2 points out of the money; and if the price stops at thestrike price of $30 per share, it is at the money.These definitions are opposite for puts. When the market value of a putis lower than the strike price, the put is in the money; and when thestock’s value is higher, it is out of the money. These definitions areimportant because the actual time value and intrinsic value are affectedby the relationship of the stock’s market price to the option’s strikeprice. This relationship also determines the short side’s exposure toexercise. The actual timing of exercise is uncertain; it can occur at anytime the option is in the money. When an option is in the money,changes in the option’s premium track stock price movement point for
Chapter 2 Option Basics
11
point, so changes in the option’s value are more dramatic when astock’s market value changes in the in-the-money range.Time value premium is the intangible portion of the premium value.Also called extrinsic value, time value inevitably declines as expirationapproaches. For the option buyer, time is the enemy. Even when thelong option is in the money, time value declines as expirationapproaches. So, if a speculator pays a lot for time value, it takes substantial price movement to offset that intangible feature. For example, abuyer pays 7 points ($700) for a call that consists entirely of time valuepremium. By the point of expiration, if the stock has moved 7 pointsabove the strike price, that call is worth only $700, because all of thetime value will have evaporated. In this situation, the buyer breaks even(actually, the buyer loses money due to the trading expense on bothsides of the transaction).
The Time Advantage for Short SellersFor the option seller, time is an advantage. The higher the time valuepremium when the short position is opened, the greater that advantage.Referring to the previous example, if you were to sell a call with 7points of time value, you could close the position at a profit as long asthe premium value was lower than the original 7 points. For example, ifthe stock were 5 points higher than strike price near expiration, youcould close the position and avoid exercise—and make a $200 profit($700 received when the short position was opened, minus $500 paid toclose the position—not considering trading fees).Intrinsic value of the option premium is equal to the number of pointsthe option is in the money. For example, if your 40 option is held onstock currently valued at $43 per share, the option contains 3 points ofintrinsic value. If that call is currently valued at five ($500), it consistsof $300 intrinsic value and $200 time value. As another example, if yourput has a strike price of 30 and the stock is now valued at 29, the put has1 point—$100—of intrinsic value because the stock’s value is 1 pointbelow the put’s strike price. If the current value of the put is 4 points, itconsists of $100 intrinsic value and $300 time value.
12
OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
Long and ShortThe decision to go long (buy options) or short (sell options) involvesanalyzing opposite sides of the risk spectrum. The interesting feature ofoptions is that strategies cover the entire range of risk, often with onlya subtle change. Long options is disadvantageous in the sense that timeworks against the buyer; time value disappears as expiration approaches. Given the certainty that time value evaporates by expiration, it is difficult to overcome that obstacle and produce profits consistently. Theless time until expiration, the more difficult it is to profit from buyingoptions; and the longer the time until expiration, the more the speculator has to pay to pick up those contracts. Long options can be used toinsure paper profits, but the more popular application of long optionsis to leverage capital and speculate.There are circumstances in which conservative investors will want to golong in options. For example, following a large price decline in the market in a short time span, prices of strong stocks may rebound; but notbeing sure where the market bottom is, investors tend to be the mostfearful when the greatest opportunities are present. In these cases, buying calls allows you to control shares of stock, limit potential losses, andexpose yourself to impressive gains—as long as prices rebound in atimely manner. This may be a speculative move, but even the most conservative investor may see market declines as buying opportunities,especially if a small amount of capital is at risk.This does not mean that going long with options is conservative or evenadvisable. But every investor holding a portfolio for the long termknows how market cycles work. Options present occasional opportunities to take advantage of price swings. When overall market prices fallsuddenly, conventional wisdom identifies the occurrence as a buyingopportunity; realistically, such price movements make investors fearful,and it is unlikely that many people will willingly place more capital atrisk—especially since the paper position of the portfolio is at a loss. So,buying options can represent a limited risk for potentially rewardingprofits, an opportunity to buy more shares of stocks you continue tothink of as long-term hold issues. Fixing a strike price far below original cost also reduces your overall basis in that stock if and when youexercise long calls in those circumstances.
Chapter 2 Option Basics
13
Taking Profits Without Selling StockThe same argument applies when stock prices rise quickly. Suddenprice run-ups are of concern to the long-term conservative investor.The dilemma is that you do not want to sell shares and take profitsbecause you want to hold the stock as a long-term investment; at thesame time, you expect a price correction. In this situation, you can uselong puts to offset price decline. You create a choice using long puts.First, if and when the price decline occurs, you can sell puts as profit;the short-term profit from puts offsets the price decline in stock. Thesecond choice is to exercise the puts and dispose of the stock at thestrike price (which would be higher than current market value). Youwould take this path if your opinion of the company were to change, sothat your hold position moved to a sell position along with the declinein stock market value.You are likely to stick with the conservative path: as long as you want tohold the stock for the long term, you are willing to ignore short-termprice volatility. Even so, few investors can ignore dramatic price movement in their portfolio. When prices plummet or soar—especially aspart of a marketwide trend and not for any fundamental reasons—thechange in price levels may be only temporary. The tendency for someinvestors is to panic and sell at the low or to buy at a price peak. Inother words, rather than following the wisdom “buy low, sell high,”investors often react to short-term trends and “buy high, sell low.” Ithelps to ignore short-term trends and to resist the human tendenciestoward panic or greed; and conservative investors are more likely toequip themselves with a cooler head during volatile times. Even so, youcan retain your conservative standards and, at the same time, useoptions to exploit the market roller coaster. There are risks involved,but the alternative is to take no action but a wait-and-see approach.Options can help you deal with price volatility on the upside or thedownside without losing sight of your long-term investment goals.The question of speculative versus conservative is not easily addressed.Yes, using options to play market prices is speculative; but at times, youcan take advantage of that volatility without selling off shares from yourportfolio. The same observation applies on the short side of options,where risks are far different and market strategies can vary as well.
14
OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
Buyer and Seller Positions ComparedWhen you short options, you do not have the rights that buyers enjoy.Buyers pay for the right to decide if and when to exercise or whether tosell their long positions. When you are short, you receive paymentwhen you open the position, but someone else decides whether to exercise. Time value works to your advantage in the short position, so youcan control the risks while creating a short-term income stream. Risklevels depend on the specific strategy you employ.The highest risk use of options is the uncovered call. When you sell acall, you receive a premium, but you also accept a potentially unlimitedrisk. If the stock’s market value were to rise many points and the callwere exercised, you would have to pay the difference between the strikeprice and current market value at the time of exercise. For example, let’ssay you sold a call with a strike price of 40 and you received at premium of 8 ($800). That reduces your risk exposure to as much as $48 pershare (strike price of 40 plus 8 points you received for selling the call)—but without considered trading costs. However, what if the stock’s market value rises to $74 per share before expiration, and the call isexercised? In that event, you must deliver shares and pay $3,400 uponnotice of assignment ($74 per share current market value, minus $40per share strike price). Your loss would be $2,600 ($3,400 paymentminus $800 you received for selling the call).The uncovered call is the highest risk strategy; in comparison, the covered call is the lowest risk strategy. If you own 100 shares, you can deliver those shares to satisfy exercise, no matter what the market price.Upon exercise, you keep the premium you were paid. The greatest argument against covered call writing is the chance of lost appreciation. Inthe previous example, had you merely held onto your 100 shares, theirvalue would have increased to $74 per share. Because you wrote a 40call, you would be required to sell them for $40 per share. As a counterto this argument, a couple of points have to be remembered. First, thefrequency of large price increases should be studied in comparison tothe certainty of option premium you earn for selling calls. Second, aslong as exercise creates a profit in the call as well as capital gain in thestock, you earn a profit. For example, let’s say your original basis in thestock was $32 per share and the stock is currently valued at $38 per
Chapter 2 Option Basics
15
share. You sell a 40 call and receive a premium of 8 ($800). Upon exercise, your profit is $600 capital gain on the stock plus $800 profit on theshort call (plus any dividends you received during the holding period).That is a 43.75% return ($1,400 ÷ $3,200).The capital gain created when a covered call is exercised may produceimpressive levels of profit as long as the basis in stock was far lower.However, for the purpose of comparing option returns under differentoutcome scenarios, we do not include capital gains as part of the analysis. If you owned stock and simply sold it without writing options, youwould earn the capital gains, so we separate stock and option profits incovered call examples. In the above scenario, the option-only return,you received $800 for selling a call when the stock was at $38 per share.This is a 21.1 percent return ($800 ÷ $3,800). To make this comparableto other option returns, you also need to annualize this return.
Understanding Short Seller RisksThe short call may be high risk or highly conservative. In comparison,the short put has varying risk levels depending on the purpose of goingshort, your willingness to accept exercise, and the amount of premiumpaid to you at the time you open the short position.The decision to employ options in either long or short positions definesrisk profile; the definition of conservative is rarely a fixed or inflexiblething. It is more likely to define an overall level of attitude about specific strategies while acknowledging that strategies may be appropriatein different circumstances. It is all a matter of timing a decision basedon the current status of the market, your portfolio, and your personaldecision to take action or to wait out volatile market conditions.
Calls and Call StrategiesAs a starting point in any discussion of option strategies, two mattershave to be remembered. If you buy a call or a put option, you have theright to take certain actions in the future, but you do not have an obligation. Second, if you sell a call or a put, the premium you receive as
16
OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
part of an opening transaction is yours to keep, whether the option islater closed, expires, or is exercised. These two points are crucial indeveloping an understanding of how option trading works.Options are contracts that grant specific rights to the buyer and imposespecific obligations on the seller. If you think of options as intangiblecontractual rights (rather than as tangible items such as shares of stock,for example), the entire discussion of how to use options is easier. Itmay be worrisome for you as a conservative investor to consider trading in an intangible product, but when you relate it to other types ofinvestments, you can appreciate both the logic and the need foroptions. For example, in a real estate lease-option, you have two parts:a lease specifying monthly rent and other terms, and an option. Theoption fixes the price of the property. If you decide to exercise thatoption before it expires, you can buy the property at the specified contractual price even if property values are significantly higher.Stock market options are exactly the same, but they involve stockinstead of real estate. Every option refers to 100 shares of stock, andoptions come in two types: calls and puts. When you buy a call, youacquire the right to buy 100 shares of stock at a specific price (the strikeprice) before the option expires. All options have fixed expiration dates,so the time element of options is a crucial feature to consider whencomparing option values. For the buyer, a relatively small risk of capitalpotentially fixes the price of 100 shares of stock for several months. Ifand when that buyer decides to buy the stock, the call can be exercisedto acquire 100 shares at a price below current market value. That is theessence of the call.
Is the Strategy Appropriate?For your conservative portfolio, buying calls is not an appropriate fit inmost applications. Buying calls is the best known and most popularoption strategy, but it is usually a purely speculative move. The risks ofloss are quite high. Later in this chapter, we discuss the importance oftime value and intrinsic value, and how these features make call buyinga speculative strategy. There are exceptions. For example, if you areconvinced that a stock’s market value is sure to rise before the expira-
Chapter 2 Option Basics
17
tion of an option, you can buy calls as an alternative to outright purchase of shares. This strategy would be appropriate when:1. You are concerned with short-term price volatility, and you donot want to commit funds to buy shares, but you still want tofix the price at the strike price value.2. You want to buy shares, but you do not have funds available atthe moment, so buying a relatively cheap call is a sensible alternative (given the chance that you could lose the money).3. You are aware of the risk of loss, and you want to proceed withbuying a call anyhow.So, as with any general rule, there are exceptions. You retain your statusas a conservative investor even though circumstances may arise inwhich you would want to buy a call. It is not a conservative strategy, butall investment decisions should be driven by circumstances and not byhard-and-fast rules. While the general rules you set for yourself guideyour portfolio decisions, special circumstances and momentary opportunities or limitations can bring about exceptions.
Option Terms and Their MeaningEvery call contains a series of terms. These are the type of option, thestrike price, the underlying stock, and expiration date.The type of option is one of two, either a call or a put. The two have tobe distinguished because they are opposites. If you placed a buy orderfor an option without specifying whether it was a call or a put, thatorder could not be filled. All of the terms have to be specified in anorder.The strike price is the price of stock that may be acquired if and whenthe option is exercised. This strike price remains unchanged until theoption expires, except in cases of stock splits. You have the choice, as abuyer, of either selling the option to close the position or exercising theoption. Upon exercise of a call, you buy shares at the strike price. You“call away” the 100 shares of stock from the seller. If you exercise a put,
18
OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
you have the right to sell 100 shares, or to “put shares of stock” to thebuyer and dispose of stock at a fixed price.The underlying stock is the company on which the option is bought.The company cannot be exchanged; it is as fixed as the strike price.Options are not available on all stocks, but they can be found for themajority of stocks listed on American exchanges.The expiration date is a fixed date in the future specifying when theoption expires. This term is critical because after the expiration date,the option will not longer exist. As a buyer, you know that the timevalue premium will evaporate if your option is not exercised or soldbefore expiration date.These four terms collectively define and distinguish every option. Noneof the terms can be modified or exchanged once you buy an option, andthe option’s value (the premium you pay when you purchase theoption) is determined by the terms.If you accept our beginning argument—that buying options is not normally appropriate for you as a conservative investor, but special situations can bring about an exception to that rule—then it is alwayspossible that going long could be a useful strategy. It makes sense tokeep the idea in reserve as one of many possible ideas. It’s a mistake tosimply reject a possible strategy because it is not a good fit with thegeneral investing theme. However, remember that, for the most part,you will not be willing to speculate by buying options.
The Cost of TradingAugmenting the complexity of buying is the trading expense involved.This applies to both sides of the transaction. You are charged a fee whenyou open the position and another fee when it is closed. In any calculation of risk and potential profit or loss, the cost of trading thereforemust be included. If you deal with single-option contracts, you limityour exposure to loss. But at the same time, the per-option cost of trading is quite high. With this in mind, option traders often execute transactions using multiple option contracts. This reduces the cost of tradingand results in lower per-option cost. But remembering that buying
Chapter 2 Option Basics
19
options is a high-risk venture, using multiple contracts just to reduceper-option trading costs does not reduce overall risk; it increases it,because you must put more capital at risk. For the option buyer, tradingcosts make the proposition even less likely to turn out profitably.As a call buyer, the odds are against you. A second possibility is far moreinteresting and potentially more profitable: selling calls. If you are familiar with selling short, using stock, you know that the sequence of eventsis opposite than when you go long. You have to borrow shares of stockin order to sell, and opening the short position exposes you to the possibility of loss. If the stock’s market value rises, you lose money. So, shortsellers expect the price of stock to fall. Eventually, they close the positionby entering a closing purchase transaction. Short sellers have to makeenough profit to offset the cost of borrowing stock, trading fees, and thepoint spread between original selling price and final purchase price.Selling stock is high risk without any doubt. If the stock’s value rises,you lose money, and short sellers are continually exposed to that market risk. Two observations about going short on calls: first, the transaction is far cheaper and easier than shorting stock, and second, thestrategy can be either very high-risk or very conservative.
In, At, or Out of the MoneySelling a call is easier than selling short shares of stock, because you donot have to borrow calls to go short. You simply enter a sell order, andthe premium (the value of the call) is placed into your account the following day. When you sell a call in this manner, you are in the samemarket posture as the short seller of stock, but possibly at less risk. Youare hoping that the price of stock will fall so that your short call will losevalue. That means you will be able to either close the position profitablywith a closing purchase transaction or simply wait for the call to expireworthless. As long as the market value of the underlying stock remainsat the strike price (at the money, or ATM) or below the strike price ofthe call (out of the money, or OTM), exercise will not occur. When thestock’s market value is higher than the call’s strike price (in the money,or ITM), you are at risk of exercise. The proximity of the stock’s currentmarket value to the strike price is summarized in Figure 2–1.
20
OPTIONS TRADING FOR THE CONSERVATIVE INVESTOR
at the money
in the money
strike price of the call
out of the money
Figure 2–1 Strike price and stock price.
In the figure, you may observe that the option’s strike price remainslevel, but the status of the option relies on stock price movement. Thisillustrates how a call functions. Whenever the stock’s price is higherthan the call’s strike price, the call is in the money, and whenever thestock’s price is below strike price, the call is out of the money.We can apply the same logic to a put, but the terms are reversed.Referring again to Figure 2–1, if the stock’s price were higher than thestrike price of the put, it would be out of the money, and if the stock’sprice moved below the strike price, the put would be in the money.The relationship between strike price and stock price is critical for anyone who opens a short position in options. The short-call position canbe one of the highest risk positions you can assume. However, it canalso be one of the most conservative positions. This riddle is explainedby whether or not you own 100 shares of stock when you sell a call. Ifyou go short with calls and you do not own the stock, risks are theoretically unlimited because the market value of stock can rise indefinitely.This uncovered call strategy is clearly inappropriate for your conservative portfolio. However, when you own 100 shares, they are available inthe event the call is exercised; so in the right circumstances, call sellingis highly profitable and conservative. Chapter 3, “Options in Context,”compares short calls in these contradictory risk profiles, and Chapter 5,
Chapter 2 Option Basics
21
“Options as Cash Generators,” provides in-depth explanations of covered call-writing strategies, the ultimate conservative use of options.
Puts and Put StrategiesThe put is the opposite of the call. If you buy a put, you acquire theright (but not the obligation) to sell 100 shares of the underlying stock.If you exercise a put, you sell 100 shares at that strike price, even if thecurrent market value of stock was far below that level. Like the call, theput expires at a specific date in the future.