Billionaire Carl Icahn Leverages Yahoo Options

Carl Icahn has been establishing a big stock position in Yahoo shares using options. Icahn's position of 59 million shares of Yahoo stock was created by using only 9.9 million actual shares. The question now is 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.

Brian Marber

Brian Marber can make a fair claim to be the most widely experienced technical analyst in the world, having been one since 1963.

A Fellow of the Society of Technical Analysts, he has been a blue button (stockbroker's clerk), stock market dealer, member of two UK stock exchanges, and managing partner of the London office of one of the largest regional broking houses.

At IOS and then at NM Rothschild & Sons, totally eschewing the fundamental approach, he was the first fund manager in the UK to manage large funds using only technical analysis.

Between 1976 and 1981, as a stockbroker, Brian Marber was voted by institutional investors No.1 technical analyst in the City for six successive years, a unique record.

When he started managing FX accounts in the 1990s, he was given exemption from the SFA Exams because of his ‘long and distinguished career in the investment industry.’

In 1980, in a survey conducted by the Treasurer of the Singer Company, Brian Marber had the best FX forecasting record in the world. For 15 years he wrote monthly for Euromoney Currency Report, and more recently for the Financial Times.

In the 1980s, Brian Marber was a Member of the Visiting Faculty of IMI (Geneva), the oldest established business school in Europe. In 1981, he founded a company which, with clients in 20 countries, became the world’s largest independent FX consultancy.

As a lecturer and teacher, Brian Marber has spoken at six Financial Times World Gold conferences, three Australian Gold Conferences, Johannesburg 100, Comex, and the Washington Gold & Silver Institute, and has also conducted seminars and teach-ins in Australia, Hong Kong, Singapore, Abu Dhabi, South Africa, Israel, Italy, UK, Eire, France, Germany, Denmark, Norway, Belgium, Holland, Switzerland and Luxembourg.

A one-time member of the Investment Panel of The Observer and regular broadcaster on TV and radio, Brian Marber is still an FX Consultant to banks, large corporations, hedge fund companies (including Europe’s oldest, Odey Asset Management), and private clients.

F14-Tomcat

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Index Options

Stock index options are based on a stock index rather than on specific stocks. The value of index calls increase as the index increases, and the value of index puts increases as the underlying index decreases. These options are similar to stock options, but with some important differences.

Because these options are based on indexes, there is greater diversification, and usually less volatility than with specific stocks. An index is never going to drop to zero, and it will never increase as dramatically as some specific stocks can, especially within a short period of time. Therefore, the risk is more limited, but so is the profit potential. Also, contract adjustments are rarely needed for a stock index. For instance, stock splits of stocks within the index do not affect the index, and thus, no adjustments on the contracts are needed.

The strike price is based on an index value multiplied by the multiplier of the contract, which is usually $100 (USD). These options are settled by the exchange of cash, not securities, which, for obvious reasons, is called a cash settlement. The option writer who is assigned an exercise pays cash to the holder who exercised the option.

Many index options are American-style options that can be exercised for a short time right before expiration. However, this makes little difference for options that are settled in cash, because the option holder can always sell the option on the exchanges for cash at any time before expiration. In fact, Kuala Lumpur Composite Index (KLCI) options are European-style options. They can only be exercised on the last day of trading.

The cash that is paid upon exercise depends on the index, which depends on the component prices of the index. Some contracts have AM settlement and some have PM settlement. In AM settlement, the cash settlement value is calculated using the opening component prices on the day of expiration. In PM settlement, closing prices on the day of expiration are used to determine the cash settlement value of the contract.

The cash settlement amount is determined by multiplying the absolute difference between the index and the strike price of the option times $100. For instance, SXY KO-E (2006 Nov 1375.00 Call) is based on the S&P 500 index. If the index should close at 1400 on expiration day, then a call holder would receive (1400 - 1375) x 100 = $2,500, and the assigned call writer would have to pay that much.

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Investing Is Not What Most People Think

Many people think that investing is this exciting process where there is a lot of drama. They think investing involves a lot of risk, luck, timing and hot tips. Some realize that they know very little about this mysterious subject. So they entrust their faith and money to someone they hope knows more than they do. Many other so-called investors want to prove that they can outsmart the market. Actually, this is not investing. This is more like gambling or should be described as guessing.

"Investing is a plan, often a dull, boring and almost mechanical process of getting rich."

Robert Kiyosaki

So according to Robert Kiyosaki, the correct definition or attitude towards investing should be something stated above. Investing is simply a plan, made up of formulas and strategies or a system that will almost guaranteed for getting rich. Of course, there are always some systematic risks that are unavoidable. Thus, investing does not have to be risky, dangerous and exciting.

So it is just common sense for anyone wishes to achieve financial freedom to find a plan or recipe to be rich and follow it. Why try to make your own unproven recipe when someone else has already shown you the way?

In fact, following a simple plan to become rich is boring. Also, human beings are quickly get bored and want to find something more exciting and amusing. That's why very few people ever become rich. They start following a plan and soon they are bored. So they stop following the first plan and look for a magic way to get rich quick. Soon after, they are trapped and fall prey to the "Get Rich Quick Scheme".

Most people cannot stand the boredom of following a simple and uncomplicated plan. They repeat the process of boredom, amusement and boredom again for the rest of their lives. They think that if investing is not complicated, it cannot be a good plan. In fact when it comes to investing, simple is better than complex.

As an example, most of us have played Monopoly as children. The formula and strategy involved is simply buy four green houses and then exchange them for a red hotel. Believe it of not, playing Monopoly in real life were what some of the successful entrepreneurs were doing. Once they learnt the formula, the process became automatic. They could do it even when they were sleeping and without much thinking.

So just find one simple formula and follow it. Nobody needs to be a rocket scientist to be rich. All one needs to do is simply know what is wanted, have a plan and stick to the plan. In other words, all it takes is a little discipline.