Today I want to share with you the story of my greatest trade. And it was pure luck!
In the summer months, trading tends to get slow on the CBOE and other trading floors. Trading desks are staffed by junior traders because the top traders are spending their times at the Hamptons and other luxury beach locations.
Many summers ago, early in my trading career, I was a market maker in the Google crowd. It was sometime around noon, and most of the nearly 40 traders who made up the crowd were off grabbing lunch or perhaps a mid-day cocktail (this was the old trading floor, and some traders would enjoy a mid-day drink or two if trading was slow). I found myself one of three traders left in the crowd.
Out of nowhere, running into the trading crowd was a broker from Goldman Sachs we all called OGR. He was well over six feet tall and overweight, and when he came around, you knew a big order was coming.
He hollered, “Google, how are the July 600 Puts?!”
Because there were only three of us in the crowd, we didn’t have to rush to make the market, and calmly figured out what prices we would buy and sell the puts for.
“10 dollar bid at 10.50” I said. I had determined the option was worth $10.25, so I was willing to buy it at 10, and sell it at 10.50. This would give me $0.25 of edge if I bought or sold the option.
OGR screamed back in a panic, “Sell 1,000 at 10!”
I bought 100 puts from OGR and bought 5,000 shares of GOOG to hedge the trade.
OGR left the crowd, and I went back to being bored.
Next thing I knew, OGR was back in the crowd, whispering into his phone.
Then he screamed at us, “Google, where are the puts?!”
Now that I had bought 100 of these puts, my bid was lower, especially since I knew he was selling.
“$9.50 bid at 10.25” I replied. I was willing to buy these options for $0.50 less than the original purchase.
OGR screamed back, “Sell 5,000 at 9.50!”
I bought 200 more puts and bought 10,000 shares to hedge.
But OGR’s put selling was just getting started. “Where are they now?!” he roared.
Over the course of the next 30 minutes, I had bought 1,000 puts. And these weren’t $0.10 puts. These were high value puts, costing $8 to $10 per contract. I knew I had bought a lot of premium and was slightly concerned.
At the end of the day, I got back up to my office and calculated how much premium I had bought. To my horror, I had bought over $10 million dollars’ worth of puts that would expire in the next month. If Google was range-bound, the decay of these puts would eat me alive. (This was before I was running a big trading desk. I was a young trader at the time, with a smaller account. Once I was running a trading desk, the size of this order would be a drop in the bucket, as I was carrying hundreds of positions much larger than this trade.)
That night, I couldn’t sleep. I was sure the market and Google weren’t going to move for months, and I would lose a couple of thousand dollars a day in decay. I vowed that first thing the next morning, I would cut the trade by 1/10 every couple of hours.
When the bell rang the next day, I got to selling. Within an hour, I had sold 1/10 of the position for a small loss. And I had plans to sell more.
Next thing I knew, Google dropped $5. Then $10. Then $25. And then, in a heartbeat, it fell to be down $50 on the day! The broker in my crowd was buying puts as fast as he could, as customers were panicking to hedge themselves.
I sold my entire position, netting many millions of dollars in profits.
I was overjoyed that I had gotten out of the position, and clearly happy that I had made a fortune along the way.
And just as fast as the stock had fallen $50, it came running back to unchanged on the day.
So what had caused the stock to tumble and then bounce back?
At a meeting with analysts, the Google’s CFO had put the wrong slide in his presentation, which had erroneous numbers. When he realized the mistake, he apologized, and put in the correct slide.
But before the stock could bounce back, I was out of my position. and I had made the greatest trade of my young career.
And as they say on the trading floor, sometimes it’s better to be lucky than good.