Good morning, traders…
Jeff here.
A few weeks ago, I wrote about some of the wildest options trades in history โ billion-dollar windfalls, gut-wrenching losses, and risks so high they make your head spin.
But these arenโt just entertaining stories to make aspiring traders mouths waterโฆ
Hidden within these stories are powerful lessons โ insights that can change the way you approach the market โฆ forever.
As much as I love recounting the greatest hits of Wall Street, there are plenty of other legendary trades that don’t make the headlines โ but they should.
These trades are hidden gems that show us the options trading skills to look up to โ and the dangerous mistakes to avoid.
If you want to be the best โฆ youโve gotta learn from the best.
Today, Iโll break down some of the biggest options trades youโve never heard of (and explain the crucial lessons we can take away from them)…
2007: Victor Niederhofferโs โYen Carryโ Disaster
Victor Niederhoffer was once a well-known hedge fund manager with a stellar track record.
That is, until 2007 when he made a fateful options trade that ended in catastropheโฆ
Niederhoffer was a fan of selling options on the Japanese yen, betting it wouldnโt gain ground against the U.S. dollar.
This strategy, known as the โyen carry trade,โ worked well for a while. But when the subprime crisis struck in 2007, volatility surged, and the yen soared.
Niederhofferโs fund couldnโt cover the losses, leading to its complete and total collapse.
Lesson for Traders: Selling options may generate steady income during low volatility periods, but it can wipe you out when volatility spikes unexpectedlyโฆ
Itโs like picking up pennies in front of a steamroller.
The key takeaway is that options selling is an incredibly dangerous game โ the โtheta gangโ must always be prepared for unexpected market moves.
But while Niederhoffer was blowing his accounts up, another trader was weaponizing the recession market to his advantageโฆ
2008: Andrew Hallโs Crude Oil Trade
As the global economy was crumbling in 2008, a lesser-known trader named Andrew Hall made one of the boldest oil trades in history.
Hall โ a commodities trader at Phibro (a unit of Citigroup) โ bet that crude oil prices would hit $100 per barrel by the end of the year.
His managers thought he was crazy as he loaded up call options on crude oil futures.
But Hallโs belief in rising crude prices wasnโt just based on a gut feeling โ he had a deep understanding of global oil markets, supply constraints, and geopolitical tensionsโฆ
And sure enough, by mid-2008, oil did surpass $100 a barrel (peaking near $147).
Hallโs foresight earned him around $100 million personally (and even more for his firm) โ as well as the moniker of โThe Oil King.โ
Lesson for Traders: Hallโs trade shows the importance of understanding broader market forces (like supply and demand) and how they affect commodity prices.
Additionally, this trade is a perfect example of how larger macroeconomic factors can lead to some of the biggest moves in the markets.
Hallโs ability to see the forest through the trees (and remain patient in a volatile market) made him a fortune.
2017: Seth Klarmanโs Puerto Rico Bonds Bet
In 2017, Seth Klarmanโs Baupost Group made a calculated options trade on Puerto Ricoโs distressed bonds.
After Hurricane Maria devastated the island, Puerto Rican bonds collapsed in value.
And while most traders were scrambling, Klarman saw a โfat pitchโ coming right toward the middle of his batโฆ
Klarman began buying up deeply discounted bond options, betting that Puerto Rico would eventually restructure its debt and recover.
Sure enough, when the restructuring plan was finalized in 2021, Baupost reportedly made hundreds of millions of dollars.
Lesson for Traders: Klarmanโs play illustrates how factors completely unrelated to finance (in this case, even the weather) can influence enormous shifts in asset prices.
Additionally, this trade underscores the power of contrarian trading (i.e. the ability to spot distressed opportunities that others overlook).
When markets panic, smart traders look for mispriced assets, and options can help you control large positions with defined risk.
2021: SoftBankโs Masayoshi Son: The โNasdaq Whaleโ
In mid-2020, SoftBank chief Masayoshi Son made headlines as the โNasdaq Whaleโ for aggressively buying billions in call options on large tech companies (including Amazon, Microsoft, and Tesla).
This wasnโt your typical options trade โ it was a massive, coordinated bet on the entire tech sector, with some estimating SoftBank was responsible for up to $50 billion in options exposure.
While the tech rally fueled their positions for a while, SoftBankโs massive exposure to high-risk calls also made them vulnerable to a reversal.
When volatility spiked in September 2020, their strategy backfired, contributing to a market-wide selloff.
Although the total profits or losses were never fully disclosed, itโs clear that SoftBank lost billions in the process.
The trade was a high-risk, high-reward strategy that created significant volatility in the market.
Lesson for Traders: This trade is a perfect example of why you should never risk more than youโre willing to lose.
Additionally, itโs a lesson about the dangers of being a perma-bull or perma-bear.
Masayoshi Son was evangelically bullish on tech. Nothing could change his mind. When the market started reversing, he had blinders on.
He didnโt see the bearish signals โฆ and paid the price.
2020: Chamath Palihapitiyaโs Bold Tesla Call
In early 2020, Chamath Palihapitiya โ known for his early investments in companies like Facebook (and as co-host of the popular All In Podcast) โ took a highly publicized options trade on Tesla stock.
As an outspoken Tesla bull, Palihapitiya purchased millions of dollars in Tesla call options, betting the stock would continue its meteoric rise.
And his timing couldnโt have been betterโฆ
Tesla shares surged more than 700% in 2020, while Palihapitiyaโs call options paid off massively, with profits estimated to be in the billions.
Lesson for Traders: Palihapitiyaโs trade shows the power of leveraging options in high-growth stocks.
When you have strong conviction in a companyโs future prospects, options can offer much larger returns compared to simply holding shares.
However, it also underscores the importance of timing โ catching the right trend (at the right time) is critical in options trading.
These five stories arenโt just fun to read โ they can help you understand the finer points of options trading.
Whether it’s about risk management, conviction, or simply looking for opportunities where others donโt โฆ thereโs something crucial to learn from every one of these legendary trades.
Happy trading,
Jeff Zananiri
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