Billionaire Icahn leverages Yahoo options

Business Wire, May 21, 2008

The Options News Network examines Icahn's Yahoo takeover strategy using options

CHICAGO -- OptionsPhysics Basic, hosted by Kevin Cook on www.onn.tv, drills down into the use of options by billionaire investor Carl Icahn in his bid to unseat the current Yahoo board. To view this video and article in its entirety, visit www.onn.tv and click on the OptionsPhysics Basic tab. Cook looked at how billionaire buy-out king Carl Icahn has been establishing a big stock position in Yahoo shares using options. Icahn's position of 59 million shares of Yahoo stock that he created using only 9.9 million actual shares. Cook asked, "How can Mr. Icahn hold the rest without actually owning them?"

The answer comes from a strategy that might be new to most people, but to options traders it's old hat. Icahn simply created 49 million shares of synthetic stock by buying 490,000 million call options on Yahoo stock and selling 490,000 million put options.

Synthetic positions are how investors and traders can replicate the performance and returns of stock without owning any actual stock. Buying a call and selling a put, usually of the same exercise price and expiration, is equivalent to being long the underlying stock. In other words, since he sold the right for someone else to be short the stock, if the long put holder decides to exercise their right, he will have to buy the stock at the strike price.

Another interesting thing about this trade is that Icahn bought American-style call options, which can be exercised anytime before expiration, and he sold European-style put options, which can only be exercised, and force him to buy the stock, at expiration. Icahn reportedly sold puts with a strike price of $19.50 and an expiration date of November 5th, 2010. Last year, Icahn used billions of dollars worth of options on Motorola stock to gain a significant position and win board seats in the tech company.

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