InterDigital Inc (IDCC)

[jmspaesq]

Olddog:Options play

People were pretty close to right. I bought ten call options contracts, each one is for 100 shares. I actually payed about $1 each for them (for each share so about $100 for each contract, contracts are always for 100 shares), so a total of (a tiny bit more than) $1000.

The call options contracts give me the right but not the obligation to purchase the underlying security (IDCC) for a specified strike price. I chose the Sept 17 expiry date because the August ones expire in a few weeks and things might not play out by then but I think we will at least have begun the buyout process and had a tender offer by Sept 17.

I chose the strike price of $105 per share. Strike prices that are closer to 'in the money' cost more so I figured $85s are too costly and if it goes through $85 I think it will go through $105 too, so I'm risking less but potentially leaving that money on the table.

I am also LOOKING at lower strike prices and even looking closer at longer EPIRy dates--particularly Dec and Jan calls. One pays more for the same strike price the longer out the date is because of the 'time value' meaning there is more time to realize one's gains or in this case for the buyout scenario to play out.

So I am betting with the $1000 or so that we get a tender offer in excess of $105. Since I think the bargain basement steal of the century MINIMUM would be nortel value plus our cash equalling about $115 I think there is a very likely profit built in in what I consider the worst case buyout scenario.

Since I believe the tender offer will be $125-175 OR MORE (if I wasn't being conserative I would say $150-225) and the ultimate purchase price will be $275 or above even $350 up to $500 per share, I am risking a small amount of money that I'm right.

For me to make $100K with the $1k investment the stock price would need to get to $205 a share. At $305 my profit would be $200k

One thing that I know some are considering is selling the underlying security and putting some back in to options.

A friend of mine bought in the $20s. He sold most for personal financial reasons a year ago. He still has 100 shares.

So what if he sells the 100 shares, and profits $5000 but now has no shares. He can buy options contracts (calls obviously) with 20% of his profits, hedge his downside risk (he's already taken profits) and leverage the 100 shares into the right to buy 1000 for about $1000 or now $1500 dollars last time I looked at the sept 105s.

And if the stock goes up he doesn't kick himself for selling and taking some profits, he has leveraged a small part of his profits into the right to buy more so he won't kick himself. If the options expire worthless he was playing on house money and pocketed 80% of his gains.

Not a bad play.

The biggest risk of an option unlike the underlying security is that it could expire worthless unlike the underlying security.

But I'm not going to risk my life savings (just some of it lol) and one way I can hedge the whole thing is to sell some of the actual IDCC shares I own in my regular non retirement account and use that money. I also have those unique company grants which haven't and never do expire.

I am also considering hedging the time risk of the Sept options by buying more 100 or 105s but with Expiry dates of Dec and Jan.

Still a bet that this plays out as I have outlined from the night of the Nortel auction but that it takes longer than I think.

Good luck to me, right?