The Greatest Trade I Ever Saw
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 worked in the Enron trading pit, and for years he 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 was 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,” with big trading firms such as Goldman Sachs and Morgan Stanley 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 MS.
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.
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 those are the trades we should be letting run as far as possible.
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.