InterDigital Inc (IDCC)

[The Count]

Put options.

You would be buying the 50 put options for $13,750 to open your position (you own the put contracts), which would give you control over 5,000 shares.

The put option contract gives you the right, but not the obligation, to put the shares (sell them) at the strike price ($26 in your example) at any time before the contract expiration date (March 19, 2011 in you example). When you sell the put options or exercise them (sell you 5,000 shares at $26), you will close the position, as you will no longer own any put contracts. The $13,750 is what you paid for the put contacts, so that is your cost, just like when you buy a stock, that money is your cost and when you sell the stock you get whatever you sell it for, and your purchase price has no bearing on what you get.

If the price is above $26 on March 19, you would not exercise your option and it would expire worthless. You would have a $13,750 short term capital loss on the transaction and you would still own all your shares. You can sell your shares at any time whether you own the put contract or not. If you were to sell your shares, and then the stock was under $26 at March 19, then you could sell the put options, which would be valued at about $26-actual share price.