To: Qone0 who wrote (87799 ) 9/22/2024 1:03:38 PM From: ajtj99 1 RecommendationRecommended By
Read Replies (2) | Respond to You could just create a collar by buying puts and selling calls above and below the position. Back in 1998, Mark Cuban sold Broadcast.com to Yahoo! for $5.7 billion in yahoo stock (not cash) he owned about 25% of the company. At the time, Mark Cuban received 14.6 million shares of Yahoo trading at $95, thus his concentrated position had a market value of $1.4 billion. In order to protect the value of the 14.6 million stocks he decided to set up a costless Options Collar, which allowed him to protect his billions without paying any insurance premium. because there was a lock-in period for him to sell the Yahoo shares - often 6 months to 4 years when you hear companies getting acquired - he used these Yahoo shares as collateral for a bank loan, he didn't want to miss the opportunity if Yahoo continued to rally, he chose to enter a collar to lock in his share value without selling the shares. Here is the detail of the option trade: For each 100 shares of Yahoo stock, 1 contract of put (strike 85) was bought and 1 contract of call (strike 205) was sold. In total there were 146,000 contracts of calls and 146,000 contracts of puts traded. The premium of the put exactly offset the premium of the call, thus there was zero cost for this trade (Mark probably had to pay a commission but it is likely the commission cost was rolled into the premium as part of the total deal between Mark and brokers or counterparts). All options expired in 3 years. Such option structure is called a Collar and it consists of two legs: buying a downside put and selling an upside call. A costless collar has the premium of the put offsetting the call's exactly so that there is no cost to enter the collar trade.
