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Technology Stocks : Nortel Networks (NT) -- Ignore unavailable to you. Want to Upgrade?

To: Perspective who wrote (7512)	10/25/2000 12:19:35 AM
From: MartyS	Respond to of 14638

Bobcor, interesting post. this seems to relate to what you were saying about CSCO. Barring a recovery in its share price, Dell Computer faces a hefty liability stemming from heavy sales of put options on its stock. At the end of its July quarter, Dell had puts outstanding on 107 million shares, struck at an average price of $46. With its stock falling in the past few months to 28.50, Dell will have to pay $1.9 billion ($17.50 times 107) to extinguish those puts if its stock doesn't appreciate before the puts expire over the next three years. Puts give the holder the right to sell stock at a fixed price. Dell, as the seller, must buy the stock at a predetermined price even if the market price is far lower. Dell, like several other technology companies, including Microsoft, has sold puts in recent years without getting burned because ever-rising stock prices rendered the puts worthless while the company collects the premium on the option. Dell says it sells puts in order to finance its purchase of calls, which it uses as part of its share-repurchase program. Don't look for Dell's put liability on its balance sheet, because the puts are structured in a special way that allows the company to pay off the puts using either cash or stock. That's right, stock. If the puts are in-the-money at maturity, Dell can issue stock equal to the put value. If stock is issued, the only effect on Dell's results is the profit dilution stemming from the equity issuance. The current put liability is substantial, representing almost half of Dell's cash position of $4.3 billion and nearly a year's worth of net income. Microsoft also was sitting on a hefty put liability until last week's surge in its stock. It had 157 million put options outstanding on June 30 with strike prices ranging from 70 to 78. At its recent low of 48, the put liability totaled around $4 billion (assuming an average strike price of 74). But the liability fell to around $1.4 billion given the rise in Microsoft's stock last week. Microsoft has ample ability to pay off the puts with cash if it chooses, given that its cash position totals almost $25 billion. The Dell and Microsoft situations show that put sales don't amount to "free money" for tech companies. It's possible that Microsoft and Dell will rise enough so that the puts will again expire worthless. But if the technology sector collapses, and both stocks fall sharply, the puts will exact a punishing toll, especially for Dell.