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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: nihil who wrote (21602)	4/26/1999 11:12:00 AM
From: Just_Observing	Read Replies (1) \| Respond to of 74651

MSFT's Option Strategy So what MSFT is actually doing is letting the market issue out its shares rather than directly selling them to raise cash. Thus, if the stock falls, the put buyers can then sell shares to MSFT and MSFT will sell the shares on the market (or buy it for itself with the 22 billion in the bank). MSFT truly appears to have a zero risk strategy. Why doesn't every company do this? Let's put in some numbers to check this out. Let's assume that MSFT has sold put warrants for 100 million shares at a strike of $60 per share. Let's assume the warrants which expire in a year are sold for $5.5 which gives MSFT its earnings of 550 million a year. If, by any chance, the stock falls to $60, the value of MSFT warrants will shoot up to $8 or $9. Yet it's unlikely that many of the warrants will be exercised. They will be traded for insurance purposes. Only if the stock falls substantially below $60, the warrants will be exercised. The result will be an extra supply of 100 million MSFT shares on the market which will depress the stock price unless MSFT spends 5 to 6 billion of its cash to buy the 100 million back. The only major risk is that of a stock market crash. Here MSFT will be buying back 100 million shares at substantially higher prices than the market. The $5.50 warrants could trade as high as $20. There is a possibility that MSFT is covering its warrants by buying puts when the stock touches new highs. For example, if I had sold the warrants for $5.50 and then the stock touches $95, then I could have bought puts equivalent to the warrants for around $1 to $2. With such a strategy, downside risk is minimized though the potential profit has been cut from $5.50 to $3.50 to $4.50. Does MSFT take advantage of price fluctuations to close out positions? Any further info. on the MSFT options strategy will be greatly appreciated. And thanks to all those who have already contributed.