El Guapo,
Wayne gives alot of good advice, but I wanted to ask a few questions and throw in some thoughts.
First of all, just as important as bang for the buck is allocation. In other words, how much do you want to risk? It would be a mistake for example to assume a person is converative because they buy near the money puts, and then find out they put all of their money into those options. Conversly, it isn't necessarily too risky to buy farther out options if used with a small amount of one's account, or possibly hedged with other positions.
Also, I don't mean to sound suspicious or anything, but if you had insider information that the company was about to release an earnings warning or something, it would be illegal to trade on that. Of course, you probably already know that, but I just wanted to point it out to say that assuming you don't have insider information, then how sure are you of the stock falling? And how sure can you be of the amount and the date it will fall?
The reason I ask is that you could consider a hedge where for example you could profit on a big move down, but maybe not lose any money if you are wrong and the stock moves up, or lose less if it stays unchanged. If you fell 100% it will fall, you probably shouldn't hedge, but if you thought maybe its 75/25, then you could consider one.
For example, a Put Ratio Back Spread or PRBS. In a PRBS you sell a higher strike put (in the money maybe) and buy more of the lower strike puts (maybe out of the money). Usually, you want to give some time for the stock to move in a PRBS.
For an example for KMP, you could do the following based on prices I'm seeing on Yahoo for Dec expiration:
Sell 2 - 57.5 - get $900 total
Buy 4 - 52.5 - pay $780 total
So, you would get $180 credit in this case and have a potential risk of $1000-180 = $820, but that would only be if KMP was exactly $52.5 at expiration. If KMP was over $57.5 at Dec Expiration, you would keep the $180 and all options would expire worthless.
Now, the math if KMP fell to $40 by expiration:
Short 2 57.5 - Each $1750 against you -$3500
Long 4 52.5 - Each $1250 for you +$5000
So, you would make $1500 in that case (plus the $180 actually). Of coure, this clearly isn't as good as the profits from just buying the Nov puts if the stock does fall to $40, but I want to stress to remember that unless you are 100% certain it will fall below whatever you choose for the strike, you could risk a 100% loss.
With a PRBS like above, if the stock didn't move lower in time, you would generally set a date to close the position, for example, maybe 2 weeks prior to Dec expiration. Generally, a PRBS would show a loss if the stock hasn't moved much and time remaining has declined.
One thing I have done in the past is to do a PRBS, but add extra puts as well. That way you can profit more from a down move, and maybe just breakeven or take a small loss from a move up.
Of course, it may also be better to stick with straight put buying instead of complex positions if you are new to options trading.
I do agree with Wayne though that if you are certain it is going down, decide when you think it will happen and buy the appropriate month options and go out the appropriate amount - Personally, I would tend to be slightly more cautious then you think maybe you should be.
For example, if you expect it to go down to $46 before Nov expiration, I would rather buy the 50 puts then the 47.5 puts. If you are wrong and it only goes to $48, you will be much, much better off. Remember that a drop from the current price to $48 will cause a 100% loss in the 47.5 strike puts. If you expect it to go to $49, consider the 52.5 puts over the 50 puts for the same reason.
Thanks for reading and let me know if you have any questions,
JJacksET4
