How would you like to make a 3,000% return in the market in just two hours? Impossible, you say? Actually, an unknown trader apparently lived this dream just last week.
At 9:58 AM on Thursday, July 24, while shares of SodaStream (SODA) were trading at $29.50, someone bought $7,500 worth of SODA July 25 30 calls. He (or she) paid $0.15 each for these options. If you aren't familiar with options lingo, what our hero/heroine got for this money was the right to buy SODA stock at $30, any time during before the close of trading the next day, after which the options would expire—and yes, since SODA was trading below that price, that right had no intrinsic value.
Then, at 11:45 AM, Bloomberg reported that SodaStream was in talks with an investment firm that reportedly planned to take the company private in a deal that would be worth $40 per share to SodaStream investors. Soon enough, SODA stock was trading at $36 per share, and each of those call options had an intrinsic value of $6. (Though the market was valuing SODA at $36, the options trader still had the right to buy shares at $30.) Had the trader sold his options at the peak of their value, the return would have been approximately $6 on every $0.15 invested, that's a 40X return, but SODA shares fell quickly after that, and the trader's exit timing was not perfect but merely uncanny, so the actual return came out to be about 30X, or 3,000%.
The trader made a profit of $217,500 and still had time for lunch, and I'm guessing it was a nice one. I hope it was, in fact, since the trader may not have many tasty lunches left to look forward to. Before I explain, however, I implied I would provide instructions on how to achieve this sort of return, so if you are still interested, here are three ways:
Three ways to make a 3,000% return in two hours:
- Every two hours or so, buy slightly out-of-the-money naked call options with the shortest possible amount of time left before expiration on relatively volatile mid-cap stocks. It is only a matter of time before you hit the jackpot. Note that by the time you do, you will likely have lost so much money that your 3,000% will just about cover the first weekly payment to your loan shark. So, lucky you—no worries for a whole week!
- Possess the preternatural luck to win big on your very first trade. You will note I did not claim that anyone could make a 3,000% return in two hours.
- Know something you shouldn't, and not only know it, but know when, to the hour, the rest of the world is going to find out about it.
The last method has a long and storied history on Wall Street, but it is not without its disadvantages, among them, illegality. Should you ever feel tempted to try your hand trading on a supposed inside-tip, be aware that the penalty for doing so includes a fine equal to three times any profits you make, as well as a possible prison sentence.
Somewhere out there, our hero is likely sweating bullets, and with good reason. The SEC is undoubtedly looking closely at this trade, trying to figure out who was stupid enough to pull the oldest trick in the book while the whole world was watching. Options trades such as this one are not, in themselves, unusual, but it is unusual to have such preternaturally good timing. If the SodaStream trader is a frequent trader with a history of speculative options trades, everything will probably be OK. If it turns out, he or she never made an options trade before, there will be trouble. Fact.
Or maybe not. I do recall that a few years back, in the South, a prominent lawyer received a similarly impressive return, turning just $1,000 into $100,000 in cattle futures trading, despite having no prior experience with such investments. There was never any official investigation into that episode, so who knows? There is some reason to think the SodaStream options trader could be breathing easy, particularly if he or she is married to the state governor.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.