Hi Kevin,

Have you heard about LEAPS? I recently read the book, The Big Short by Michael Lewis and he featured a small fund management group called Cornwall Capital. They used LEAPS to establish positions on companies that are "watered-down" by scandals or rumors. Whenever those issues were resolved, they'd make a killing. This topic looks like a good topic that we can spinoff from this thread.



Jason

That's extremely interesting Jose, I want to look into that book, which one is it?

You should also definitely read the Rise and Fall of Long Term Capital Management by Roger Lowenstein -- extremely good book that explains both the technical and human story behind how a very profitable trading strategy quickly developed into much larger, one-sided bets on macroeconomic events, and how the guys at Long Term Capital ended up taking on huge institutional risk through derivatives bets on things like the Russian default crisis and the Asian Financial Crisis and resulting changes in spreads across different interest rates in the world economy.

Ramos,

Yes I have heard of LEAPS. They are pretty much super long-term options contracts. Its a nice idea of a stock substitution for only a fraction of the price. But one thing that would worry me is that if the stock does not go your way, and you wait for it to, then that time decay will just demolish your profits. BUT if you are sure that the equity is going to go up or down, you can really make some money with some directional bets .
I'm just uncomfortable with holding onto outright calls and puts, because they fluctuate so much! One day you're down $400, then the next you're up $600. Its like an emotional roller coaster.

-Kevin

Hi Jimmy,

The title of the book that I'm referring to is The Big Short: Inside the Doomsday Machine by Michael Lewis. The LEAPS play used by Cornwall Capital is simply ingenius.

How would you audit an investment bank? it is impossible to properly value these derivatives because even the hedge fund managers are unsure of their true value.

A value proposition solely based off derivatives can be very rewarding but is very volatile,
Value investing is the way to go.