How to protect my stock with long put?

Q: I have SBUX stock that has appreciated significantly since I bought it three years ago. I read McMillan book and it recommends that buying very long term (like two-yrs LEAPS) put option is the best strategy to protect a long stock position from loss, but it didn't go into much details about how out-of-money should such a put be. Do you guys have any experience of doing this? Thanks!

A: leap put in your situation would be like buying insurance for say your car. How much value do you want to protect against loss and for how long, and what kind of deductible are u willing to take on, those are the 3 main deciding elements (not considering implied volatility).

For example, if u bot 1 jan09 35 strike put (800 days) u have the right to sell 100 shares of sbux at 35, no matter how low sbux went. So u are saying u have protection from 35 on down, with a $2.33 per share deductible (current closing price minus 35, assume stock at 37.33) , for 800 days.

But wait, that insurance contract will cost you $400, so 35 less 4pts is 31. Your real protection at jan 09 expiration is really 31 on down. So refer to the options chain and pick the choice that best suit your needs, based on the simple rules I have outlined above.

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