202  •   The Intelligent Option Investor
realized loss because it cannot be recovered. If the stock fails to move into 
the area of exposure before option expiration, there will be no profit to 
offset this realized loss.
In economic terms, this transaction allows an investor to sell short 
an overvalued company without accepting an uncertain risk of loss if the 
stock rises. Instead of the uncertain risk of loss, the investor must pay the 
fixed premium. This strategy obeys the same rules of leverage as discussed 
earlier in this book, with ITM put options offering less leverage but a great-
er cushion before realizing a loss than do ATM or OTM put options.
T enor Selection
Shorting stocks, which is what you are doing when you buy put op-
tions, is hard work, not for the faint of heart. There are a couple of 
reasons for this:
1. Markets generally go up, and for better or worse, a rising tide usu-
ally does lift all boats.
2. Even when a company is overvalued, it is hard to know what cata-
lyst will make that fact obvious to the rest of the market and when.
In the words of Jim Chanos, head of the largest short-selling hedge fund 
in the world, the market is a “giant positive reinforcement machine. ”
1 
It is psychologically difficult to hold a bearish position when it seems 
like the whole world disagrees with you. All these difficulties in taking 
bearish positions are amplified by options because options are levered 
instruments, and losses feel all the more acute when they occur on a 
levered position.
My rule for gaining bullish exposure is to pick the longest-tenor op-
tion possible. I made the point that by buying LEAPS, you can enjoy a 
likely upward drift that exceeds the drift assumed by option pricing. When 
buying puts, you are on the opposite side of this drift factor (i.e., the “ris-
ing tide lifts all boats” factor), and every day that the stock does not fall is 
another day of time value that has decayed without you enjoying a profit. 
On the other hand, if you decide not to spend as much on time value and 
buy a shorter-tenor put option, unless the market realizes that the stock is