U.S. corporates are turning once again to writing puts on their own stock in response to sagging share valuations, stratospheric implied volatility and falling interest rates. In particular blue-chip technology companies are re-entering the market as part of their share buyback programs, as their share prices have been dragged down by negative sentiment, say corporate equity derivatives marketers in New York.
Jim Kern, senior managing director and corporate equity derivatives marketer at Bear Stearns in New York, said his firm has seen a double-digit increase in interest in this kind of business in the last several weeks, from both technology companies and old-economy manufacturing companies. As share prices have been falling over about the last six months, companies have generally become more interested in buying back shares. Put writing only started to make good sense in the last several weeks, however.
Clients typically sell puts that are 0-10% out of the money, with maturities from 3-12 months, said an equity derivatives marketer in New York. They tend to favor the over-the-counter market for these transactions because it is more liquid, and the strikes and maturities can be more easily customized.
Don Barger, senior v.p. and cfo at Yellow Corp. in Overland Park, Kan., said his company would consider writing puts if it reactivated its share buyback program. The Yellow Corp. is a freight transporation company with revenues last year of USD3.6 billion.
