It was 11:58 a.m. on Friday, October 16, 1987... three days before one of the biggest market events in financial history.
I’d recently placed an options trade on the S&P 500. I bought a ton of bearish put options for $1 per contract – a total investment of $5,000.
From almost the exact moment I purchased the puts, the market began to fall. The trade was instantly profitable, growing more so with each passing day. That day – as the last hour of trading approached – the puts reached $8 per contract.
My modest little $5,000 speculation was now worth $40,000...
Suddenly and inexplicably, the puts shot up another $2. I couldn't understand it...
All of my computer pricing models told me the real value of these puts was just over $7... and here they were trading for $10.
I was staring right into the blowhole of my very first ten-bagger. I was anxious to book the profit. But my gut was telling me to hold on to the trade.
Logic, however, argued otherwise...
Logically, I made 10-times my money in four days... and the odds were significantly against additional gains.
Logically, it made sense to avoid carrying the trade over the weekend.
Logically, the options were trading 40% above fair value – an absolutely ridiculous premium. Anyone with any common sense would be a seller of these puts.
But my gut was telling me to hang in there. It was screaming at me to hold on with everything I’ve got.
After several excruciating minutes of a tug-of-war match between my brains and my intestines, I declared logic the winner.
At exactly 11:58 a.m. PST on Friday, October 16, 1987, I sold my puts at just a fraction over $10 per contract. I excused myself from my trading desk, ran down the hall to the Men's Room, and suffered for the next twenty minutes as my guts expressed their displeasure with my decision.
What happened on the next day of trading is legendary...
On Monday, October 19, 1987, the stock market crashed:
* The Dow lost 513 points – the largest one-day percentage drop in stock market history (22.6%!)
* And the puts I’d just sold were trading for $120 per contract.
On the morning of Tuesday, October 20, 1987, as investors rushed in to buy puts at any cost, the puts I’d just sold for 10 dollars opened for trading at $160 per contract.
The puts that I sold for a ten-bagger - a profit of over $45,000 - were now worth $800,000!
That's the type of trade that legends are made of... and while missing out on it was painful at the time, it provided me with one of the best lessons of my career (in retrospect, of course):
Don't let emotions and hunches get in the way of logic and strategy. With all of the hysteria during the crash, I could have lost BIG.
I was 23 years old at the time. Logic has proven to be a much better guide in many trades since then...
So... while I occasionally kick myself for the 800 grand I can sometimes see sitting in stacks on my kitchen table, I'm glad I didn't stay in. Because there are more than a few similar occasions where the market would have clobbered me had I only followed my gut. And I've more than made up for it with some huge winners, by sticking to my trading strategy.
Whenever logic is saying one thing and your gut is arguing strongly the opposite, pay a little more attention to logic. Right now, logic says even though gold and other commodities have been down recently, it’s simply a correction. Smart traders will see this volatility as ripe with opportunity.
Good trading,
Jeff Clark
