Not for the Faint of Heart
The Greatest Options Trade I Ever Saw
As a trader on the Chicago Board of Options Exchange (CBOE) for over 10 years, I witnessed and heard many unbelievable trading stories. There were stories of traders risking too much and losing everything, and traders retiring by the age of 25 having made their fortune though skill or luck.
One of the classic stories of luck happened during the crash of 1987. Legend has it that one trader thought he had bought one put on the S&P 500 (the right to short the S&P 500), only to find out many hours later he had bought 1,000. This lucky mistake netted him well over $10 million!
Another great story came from my old trading company. My former boss, a trading veteran of nearly 30 years and a millionaire many times over, was as cheap as anyone I’d ever met—in fact, he had never given a raise to a clerk or intern as long the company had been in existence.
One day, my boss and another trader got into a fistfight in the middle of the trading crowd. The fight deteriorated to the point that these two 50-year-old men were rolling on the ground wrestling. The story goes that my boss was in trouble as the other man had pinned him down and was repeatedly punching him in the face. Out of nowhere, my boss’ clerk, a woman no larger than 5’2” and 100 lbs. and whose voice never rose higher than a whisper, picked up a computer monitor and bashed it over the head of my bosses’ opponent.
As soon as the trading day ended, my boss walked across the street and withdrew $10,000 in cash and handed out his first ever bonus.
Clearly the trading floor is not for the faint of heart. However, for those that excel in the fast-paced world of trading, there’s no better place in the world than the CBOE.
Editor’s note: I hope you’ll join me and all the Cabot analysts at the Cabot Investors Conference where I’ll share many more stories of luck and fortunes made and lost. Don’t miss the early registration discount. Click here to make your reservation today. We look forward to seeing you in August!
The Greatest Trade
Not many people outside of my old company know about this trade—it’s the greatest trade I ever witnessed.
Some traders don’t stop talking about their brilliance and all the money they make through their great trading skills. Others like Pete, a trader who worked at my company, make their money quietly. That’s why so few know about this trade.
Pete traded in the Enron trading pit. For years, Pete made good money simply trading Enron in a conservative manner. However, once the cracks started forming in the Enron story, Pete used the leverage of options to build a massive bearish position.
In case you don’t remember, Enron was trading as high as 90 a share in August of 2000, and by December of 2001, the company would be near bankruptcy.
Pete didn’t make his fortune by shorting Enron at 90. In fact, he slowly made money trading it conservatively until the stock neared 35 in September 2001. At that point, the “sharks were circling” as big trading firms such as Goldman Sachs and Morgan Stanley were in Pete’s trading crowd buying as many puts as they could. With the stock trading at 35, these “smart money” traders were buying puts that would enable them to short the stock at 25 and 20. The other members of Pete’s trading crowd couldn’t believe the lunacy of buying these puts, so they aggressively sold puts to Goldman and Morgan Stanley.
Pete, on the other hand, quietly bought the same puts as Goldman and MS suspecting that the “smart money” might have more information than the rest of us. The stock collapsed in the proceeding weeks, trading at around 10 by early November 2011.
Most traders at this point would have locked in their profits, and maybe even taken a bullish position thinking that the company couldn’t possibly go out of business. In fact, our boss begged Pete to lock in his big score and get long. But Pete kept his short position, and continued to aggressively buy 10 and 5 strike puts.
Soon enough, the stock traded at under a dollar a share and Pete had made the greatest trading run I’d ever seen.
Pete wasn’t the smartest guy on the trading floor. He wasn’t even the smartest guy in my small trading company. But he’s one of the best traders I’ve ever seen at riding his winners.
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Trading stocks and options is a great psychological battle with ourselves. Far too often, we sell winners too soon and let losers run too far. Just think about how great it feels to lock in a profit and get that instant gratification—yet these are the trades we should be letting run as far as possible.
Even with all of my trading experience, I still fight against myself. Right now, my subscribers and I have a big winning trade in Applied Materials (AMAT) calls. We’ve been in the position since mid-January and it’s now up about 175%. The stock looks great and “smart money” keeps putting on bullish options positions … and yet, it’s the first position I want to sell when the market goes down for a day—the exact opposite of how I should be thinking!
I’ve been winning this battle with myself more and more these days and I continue to hold the AMAT position.
So next time you’re thinking about selling out a profitable position, ask yourself this: Are you selling it because you want the instant gratification of locking in a profit? If so, step back and rethink your trading plan … and maybe even think back to the story about Pete, and the greatest trade I ever saw.
Your guide to successful options trading,
Chief Analyst, Cabot Options Trader and Cabot Options Trader Pro