Options Buzz: Tales from the Pit: Mister
Softee Put Selling Sets Buyback
Scenario
By Dan Colarusso
Staff Reporter
3/26/98 4:41 PM ET
According to those in the pits, Goldman Sachs and
Microsoft (MSFT:Nasdaq) have been working together in
the
options market and their union could have some
interesting
implications for Mister Softee traders.
The word floating around the floor of the Pacific
Exchange,
where Microsoft's options trade, is that the Redmond,
Wash., software behemoth sold over-the-counter puts
to
Goldman's options desk, which in turn began selling
similar
puts into the P-Coast trading crowd, the market
makers and
traders who deal primarily with Mister Softee each
day.
During the past week or so, P-Coast traders reported,
Goldman was selling Microsoft puts at the 65 strike
price in
the July, October, January 1999 and January 2000
expiration
cycles, traders said. None of the traders agreed to
be
identified. Open interest had climbed in each of
those series,
with the 1999 January 65 puts leading the way with
more
than 14,000 contracts in play. Open interest in the
January
2000 options was 9,748 and hit 8,686 in the July 65
puts.
The October 65 puts showed open interest of 5,600
this
morning.
"Companies like Microsoft don't want to come to the
listed
markets with this kind of trade because they don't
want
people to know about it," said one P-Coast trader.
"No one
knows what strike or what month the company sold the
puts
to Goldman for. It could be any exotic combination."
A Microsoft spokesman declined to comment.
Goldman's sale of puts at the 65 strike is probably a
good
hint on the price level of the OTC options
transaction.
Selling puts accomplishes two goals for Microsoft,
traders
said. The firm gets to take in premium from Goldman
and if
the options expire worthless, it can walk away happy.
If,
instead, Microsoft's shares slump the company is
almost
forced to repurchase its shares via the put sales at
65,
effectively triggering a stock buyback and providing
support
for the stock.
"It's fairly common and an effective way to buy back
stock,"
said one options house strategist. "And an effective
way for
Goldman to buy puts."
The strategist added that because the strike price
was so far
out-of-the-money, the trade was unlikely to have any
impact
on the stock price. "If they were trading closer to
the strike
price, it could affect the stock because traders
would have to
buy more stock to hedge," he said. "It would be
fiscally
irresponsible to shareholders."
With Goldman then selling puts in the listed market,
the
price of protection came down and market makers were
more than happy to lap it up. Because market makers
are
typically long the stock, they'll sell calls and buy
some
protection in the form of the cheap puts Goldman was
peddling. The excess inventory on the floor
effectively kept
Microsoft's implied volatility low on Wednesday,
despite the
stock's quick 5-point jump. Traders didn't mind
seeing that
either.
Goldman also declined to comment, citing the firm's
policy
of not discussing its trading strategies.
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