It’s a strange feeling to hold hundreds of millions of dollars…
Walking along the streets of Manhattan, I’d pass people who had no idea I had just executed trades equal to the GDP of some small countries.
It was my job. And I was good at it.
As head of Equity Derivatives for Cantor Fitzgerald, I oversaw a team of 14: Traders, sales traders, and support staff. Our job was to execute trades for our “big money” clients.
It sounds strange. But if you do something for work long enough, it becomes second nature. And for me, executing massive trades was just another day at the office.
But one day in 2007, I saw something that caught me off guard. It was a trade so massive – so epic – that it was spooky…
Profiting From Big Money Moves
Hi, I’m Jason Bodner, the editor of Outlier Investor at Brownstone Research. For nearly 20 years, I lived and breathed the Wall Street life… working hard to make money for institutional clients and “Big Money” investors behind the scenes.
Over that time, I learned a lot about how our financial systems really work… and the hidden rules that help Wall Street win. And now I use all that knowledge to help regular investors succeed.
And as I’ll show in today’s essay, we can learn a lot from watching these moves. Which brings me back to that “spooky” trade…
One day, looking at my screen, I saw a trade hit the tape that really caught my eye. It was so big, it looked like an error – 100,000 Microsoft (MSFT) call options hitting the tape. That equaled 10 million shares. And with the share price sitting at $22.50, that single trade was worth $225 million.
It was unheard of for a stock-option trade.
Frantically, my desk called floor-brokers, clients, and friends at competitors: What was THAT?! Rumors swirled… Perhaps it was Sovereign Wealth Pension Fund? Or maybe the trade was on the back of a convertible bond?
Others suggested it was a hedge for a swap or the result of a hedge fund blowup or a large liquidation. Multiple stories meant no one knew what was going on. But we had missed a whopper of a trade and lost out on loads of commission.
Then, the next afternoon, another 90,000 contracts (9 million shares) went up. Another $200 million slipped away.
“What the heck is that?” one of my traders cried out.
In two days, half a billion dollars of MSFT had changed hands. And no one knew how such a huge trade had happened…
Behind the Scenes of an Epic Trade
As this epic trade was going on, I kept coming up empty. It was really burning me.
My breakthrough came when I offered similar options to JPMorgan, the bank that was putting up these huge orders. The trader there instantly bought 10,000 contracts (a million shares).
Compared to what had already traded, it was tiny… but I finally had a seat at the table.
And over time, I learned the story behind why JPMorgan was unloading a truckload of Microsoft options. You see, roughly 3.5 years earlier, it had bought them from Microsoft itself.
Let me explain…
Years ago, high-flying tech companies used stock options to compensate employees. These options were valued based on the stock. So when the stock sagged, these options didn’t seem as enticing to employees.
Steve Ballmer, then CEO of Microsoft, was frustrated by the gap between the company’s reported share value and the market value (the actual employee value). The problem was, the prices where options could be exercised were so far above MSFT’s trading price at the time, employees thought they were worthless.
So Ballmer spoke to JPMorgan, and the bank offered to help.
Bullish employees didn’t have to turn in their options, of course. But others elected to take immediate cash in exchange for their “worthless” options. JPMorgan conveniently bought the options from Microsoft employees who wished to sell.
Around June 2004, JPMorgan bought about 345 million options for $382 million (about $1.10 per option). That was a discount – meaning there was a potential profit on the deal. If exercised, the stock could have been worth as much as $11 billion.
JPMorgan had many routes with its new assets: It could hold ‘em, hedge ‘em, or flip ‘em, sprinkling profits out over time.
Because Microsoft was so liquid, though, I think the bank hedged and held the options. Then, in November 2007, the share price peaked at $37.06. At that price, those options alone would have been worth as much as 5X the original investment of $1.10 – theoretically, almost $2 billion.
I’d been worried that I’d missed huge trades the week JPMorgan started trading. But at that point, I didn’t know that it had barely just begun to hit the wire. This was a shockingly large trade that happened over weeks. All told, the entire trade may have had a notional value worth $12.7 billion.
It was so big that it was spooky to think that it was going on behind the scenes with no one the wiser… Billions’ worth of employee compensation just happened to be bought by a bank and then sold to the market years later.
But there are two lessons we can take away from this story…
Two Lessons for Investors
First, this epic trade was a good reminder that Big Money plays by different rules than you and me.
Institutional players get the inside track on deals ordinary people might never know about. That’s why I’ve made following the Big Money such a key part of my investing strategy with my Outlier Investor service.
We spot unusual Big Money activity happening behind the scenes and use that to inform our own investments.
Second, patience is a key part of how Big Money wins.
The bank could have flipped the options right away to capture the difference between their discount and market value. Instead, it waited for years and booked a monster win.
Of course, here’s the rub with lesson No. 2: JPMorgan held… but not nearly long enough.
If it had exercised those options and held the shares to today, the wins would have been unimaginably huge. Today, with MSFT trading at around $300, the bank would have netted a $100 billion profit.
Time rewards the patient for sure.
That’s why I’ve reminded my readers time and again not to sweat the recent volatility we’ve been seeing this summer. Historically, the stocks I recommend in my service have a holding period of six to nine months. We call that our “sweet spot.”
But many of our biggest winners have stayed in our portfolio for longer periods. We’ve reached gains like 352%, 386%, and 794% by giving them enough time to run.
And like I mentioned last week, “patience and process” is our motto for winning even in the midst of a market pullback. We’ve started to see some upward movement again this week.
I think that recovery is just underway, and we will see a steady rise in the markets while we head into the fall.
Editor, Outlier Investor
P.S. If any readers would like to learn more about how Outlier Investor works… and the current top stocks I see the Big Money buying right now… then please go right here for the full story.