Even the bigwigs in finance departments at giant companies get burned on investments, so don't feel too badly about burns you've incurred. We all have such scars. And Dell Computer(Nasdaq: DELL) just admitted a big one.
As part of its stock repurchase program, the computer giant sold "put options." A put is a stock option that gives the owner the right to sell the underlying stock to the put seller (Dell, in this case) at a set price within a set time. Long ago, the company sold put options that allowed the put buyers to sell their Dell stock (to Dell) at an average price of $50.44 per share. The stock is $27 today. So, the put purchasers exercised their options and sold all their shares to Dell.
The company bought 9.3 million shares for a total of $467 million, paying nearly twice current market value, minus whatever premium, or payment, it received for selling the puts. (Any qualified investor can sell put options. Doing so, they receive a cash payment called a premium.)
It also bought call options to purchase 6 million shares of its stock. A call option gives the owner the right to buy a stock at a specified price within a set time. Dell's call options are worthless because the current share price is far below the strike price of the call options. In both cases, its bigwigs in finance were far too optimistic about the stock's potential, and this has cost shareholders many millions.
The Motley Fool Select (free trial right now) recently ran twoissues all about stock options.
