Olagues v. Icahn in the U.S. Court of Appeals Second Circuit

Why would anyone write (sell) puts on a share of stock trading for $30.00 for one penny per share when the value of the puts is 100 times as valuable?

The above was exactly what Carl Icahn did.

Along with the writing of the puts at one penny, he bought calls for their intrinsic value or very close to the intrinsic value from the person who bought the puts at one penny. Intrinsic value means the difference between the exercise price and the value of the stock.

So rather than paying the true theoretical value of $11.00 for the calls with an exercise price of $20.00, he paid $10.01. Essentially Icahn bought the calls undervalued by the same amount as he sold the puts under valued.

Now why would he do such a thing?

Was the margin requirements lower with the lower prices? Yes the margin requirements were . Yes they were substantially lower than if he wrote the puts and bought the calls at their true value.

Were the taxes different than the taxes would have been if he used the real values? Answer is that the taxes were far lower, when Icahn sold puts and bought calla at $1.00 undervalued each.

Were the true values of the written puts recoverable by the issuer if there was a violation of SEC Rule 16 b-6(d)?. Icahn admitted the violation but how much did the issuers recover?

I know the answers. The answer is ..He paid an amount 99% less than SEC Form 4 violations require. But the court ruled that the buy of a call and the sale (write) of a put constitute a forward, which is not defined in any law anywhere.

But if selling puts and buying calls at artificially low prices resulted in large benefits compared with buying stock straight out, why would anyone buy stock in the traditional ways?

John Olagues