dell hedging

[pn]

I am attaching a picture above showing the position being taken by Dell, buying call and selling put.

Is this picture how you have interpreted Dell's position?

How is this hedging the risk? 

Thanks for any inputs.

Rgds
Padma

[Dinesh Kantaria]

Padma,

Assuming the company bought $100M stock from market at $30/share for employees/executive.

Employee will exercise options in different time and market price for Dell stock will be different, could be higher or lower. If market price is higher with the purchase price $30, company will be in profit but if it is lower than $30 than the company can lose the money.

So to avoid this risk, they put call options and same amount of put options, in this case the market fluctuation will not affect the company. So Dell don't have to worry about their budget.

This is my understanding, please correct me if I am not in right track.

Thanks,

Dinesh

--
Dinesh Kantaria
510-219-9172

[pn]

If we interpret the first picture above, when stock price is above the strike price, the put options are worthless.
However when the stock price is declining, whatever Dell was doing should nullify the effect of the stock price decline.

In the above graph, I dont see that happening.  What makes sense is if they were selling call or buying put when stock prices were declining which would nullify the effects of the decline.

So I am not clear how the position of selling put is working to hedge the risk.

Thanks
Padma

[Shashank Saggar]

Padma,

You are spot on -  Dell never considered a decline in stock options as a consideration. According to them, there sales and projections were strong and they used the "insider information" as a way to balance the risk with executive stock options. However, with the dip in 2000, they were caught offgaurd and their model failed.

http://www.1stock1.com/1stock1_059.htm

On the split side though, my guess is that Dell would think that their executives were smart enough to not sell their stocks when the stocks dropped prices and they would be safe. However thats counting on individuals discretion rather than data :-)

Shashank

[pn]

Folks

The last question is asking for comparison to other instruments...what are you considering for this?

Thanks
Padma

[Vince]

guys, not sure if i got this right but found the following that explains it. essentially, the stock repurchase was to prevent share dilution. however, given a share repurchase that the price can move up on them. to "lock in" the further shares repurchase price without spending too much $, "equity collars" were used with call and put options. i haven't been able to work out the math yet ;) so let know where you got. the dell collar would be an inverted version of the schwab link. however, without knowing the strike price of both the call/put it is rather hard to draw a payoff diagram. see the attached file and the following link. http://www.schwab.com/public/schwab/research_strategies/market_insight/investing_strategies/options/managing_risk_using_options_equity_collars.html --- On Mon, 5/2/11, Shashank Saggar <shanks...@gmail.com> wrote:

[Gabriel Bowers]

This may be too late to be helpful but I've attached a one-line black-scholes calculation that I put together.  It can be useful for trending results from changes in strike price or over time periods.

Gabriel

[Bing Chuang]

Hi guys,

Thanks to Vince, I did find something that explain what Dell is trying to do.

http://files.meetup.com/81136/OIC%20Collar%2004.pdf

Regards,

Bing