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Say company X has a share price of $80. They think their shares are undervalued, and their board approved a buyback of $1 billion. Can company X use the $1 billion to sell puts at $79, with the idea that if the price drops they buy back at cheaper than current market price, while if the price doesn't drop they make a profit and can sell puts again in the future?

I've seen no mention of this method of buybacks anywhere, but it seems to make sense. After all, both results are good for the company. The latter result (the share price goes up) doesn't result in an actual reduction in float, but it does result in a profit, and presumably shareholders won't mind. Is this already being done? If not, why not? Only thing I can think of is that it's illegal, but I don't see why.

Rodrigo de Azevedo
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Allure
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1 Answers1

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In the early 90's, the SEC issued a ruling that allowed companies to sell puts on their stock for the purpose of buybacks.

The short puts don't necessarily assure the company that they will acquire shares because if share price rises, the puts will expire worthless, generating some income, and the buyback isn't accomplished.

OTOH, if share price falls, the company buys the shares back, perhaps at a loss but that isn't relevant since they were going to repurchase shares anyway at current price at the time the puts were sold. The premium received reduces the cost of the buyback program.

There have been a lot of changes in regulations since 1992, particularly with Dodd Frank after the GFC so I don't know if this ruling has been amended or repealed.

Bob Baerker
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