MSFT short its own puts

Doug Henwood dhenwood at
Mon Apr 24 11:13:46 PDT 2000 - 4/24/00 11:01 AM ET

Commentary : Wrong! Tactics and Strategies When It Rains on Microsoft, It Pours By James J. Cramer

Why aren't we buying it right here yet? One of the more frightening things out there -- and one that you will begin to hear about in the next few days as all of the journalists from the print and TV outlets crib from me -- is the exploding share count of Mister Softee.

Microsoft, like Intel (INTC:Nasdaq - news - boards), has always believed in its stock. Like Intel it has aggressively sold millions of puts on its own stock. For years this strategy has generated giant capital gains as the puts that Microsoft sold almost always went out worthless. Don't forget, this has been the greatest up stock in history.

Now, all of a sudden, puts that have been sold are "in-the-money" meaning that they are not worthless. Anybody who bought them has the right to put more stock back to Microsoft. We don't know if Microsoft reserved for this contingency but it is very worrisome because all of these shorted puts could come back to haunt the company and generate trading losses not gains.

We haven't gotten our arms around this put selling program because we won't know until we see the corrected share count a few months from now.

But this strategy, so great for so long, is now a huge killer to the bottom line. I am sure that net-net it is a giant winner, but it sure isn't in the newly cut numbers now. Making matters worse: Microsoft can't buy back stock because it just issued stock for an acquisition. The company has to crunch a lot of stock and it can't right now.


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