The greatest stock market trades of all time

I am a self-confessed market nerd. I love the history of markets and the stories that bring them to life. Such stories often revolve around great trades, where keen market players were seemingly able to capture lighting in a bottle. For example... 

Before starting at Livewire, one of the joys of my previous role was hearing the old war stories of Marcus Padley and Henry Jennings - both great storytellers with some big stories to tell. One of Henry's stories inspired this wire, which he has been kind enough to share below. 

Steve Johnson has also shared a rollicking tale about how he was able to start Forager off the back of one great trade. 

Henry Jennings - The Summer of '87 

That summer leading up to the crash, worries started to emerge. We had the odd spasm, but nothing more than tremors before the big eruption in October. Now, at the time, there was a belief that it was never going to go down. Every pullback was another buying opportunity. 

I was a youthful options trader on the London Stock Exchange. All the institutions did was sell puts, which ultimately went out worthless. It was money for jam for them. We bought puts by the bucket load. Thousands of them. 

Now, if you know option hedging, if you buy a put, you buy the stock to hedge it. The stock we bought kept going up and covered the loss from the puts that we had been buying. It was a simple strategy. Everyone was happy. The instos earned extra income and option traders like me, took on the risk and bought the stock. I was in my early 20s and flying high.

So, there we were at Smith Brothers, a bunch of young traders who owned all the puts. A lot of them were October puts (just as well). We had a huge equity trading operation. It was not a big firm and the company was long... seriously long, going into the crash. The new computerised trading that had just been brought in added to the complications. 

Then Monday 19 October happened!

After some crisis meetings, we were ready to take the floor like gladiators entering the arena. We knew it would be make or break for the company. And so, it began!

The falls were mind-numbing. We did not have computers in those days, so it was impossible to know your true positions. The only thing I knew was that we were all very short. As prices plunged through the strike prices, I got shorter and shorter. I had to buy stock to re-hedge my delta exposure and buy lots of it. You would think that buying stock would be easy in a crash? Not so, we were only allowed to trade with our own equity market makers. So, a phone call, yes, there were phone calls, to the market makers to buy 1 million Rolls Royce shares was followed with a short sharp two-word sentence - one of which was 'off'.

We could not buy enough stock to cover our shorts. The equity market makers did not have the capacity to sell as much as we wanted and believed that a rally was imminent, and there was no value in selling a million Rolls Royce at the bottom. Of course, it turned out that it wasn’t the bottom. The FTSE 100 fell by 10.8% on Black Monday itself, and 12.2% on the following day.

We made millions that week. Puts that were worthless were now worth fortunes; everybody was buying puts to cover, or we were buying as much stock as we could to hedge our position. It was frantic. 

Fortunes were made and lost. 

We were heroes. 

Just for one day. 

When the options trading team finished the first day, we walked up to the equity trading floor (remember, it had all gone electronic by then) and were given a standing ovation. We walked amongst our peers, swapping war stories and offering congratulations and sympathy.

The upshot was the option traders had made a profit of GBP9.5m on that day. The rest of the firm had lost GBP9m. Smith Brothers was still in business. We had saved the firm. Bonuses all round.

The postscript, however, was our index futures trader had a huge punt on the market bouncing on Monday 19 and bought back all the short exposure we collectively had. He didn’t tell anyone and hid his trade until Christmas Eve. He left a note! Somewhat of a shock to find a massive multi-million-dollar loss that carried our bonuses down the Thames. It did answer the question of why our margin was so high on the Futures market though.

Steve Johnson - Ramming home the advantage

Rams Home Loans listed on the stock exchange at $2.50 per share in July 2007. Within a month of the IPO, the financial crisis began and Rams was experiencing “unprecedented disruptions” resulting in “material increases in spreads and shortages of liquidity”. 

By October of that same year, the Rams brand was sold to Westpac, the listed company had changed its name to RHG and it was never to write a new loan again. The share price was $0.30 at the end of 2008 and the New York Times crowned it the “worst initial public offering of the decade.”

It was about to become the greatest trade of my life.

I was working for a research publication called The Intelligent Investor at the time and had recommended Rams shares as a Speculative Buy at 0.95 cents per share. I thought its $14bn loan book was going to generate about $1.50 per share in cashflow for Rams shareholders, even if it never wrote another loan.

That was August 2007. By 30 June 2008, it was trading for less than 10 cents a share (the all-time low was 4.6 cents).

I didn’t manage to buy at the low, but I still have the trade confirmation for a parcel of shares I bought at 7 cents a share. Over the next five years, RHG paid out $1.21 per share of fully-franked dividends and was eventually acquired for $0.50 per share in December 2013.

My returns from the first purchase were nothing to write home about. It was the capacity to buy at the point of maximum pessimism that made for my best-ever trade.

The profits from RHG allowed me to start what is now Forager Funds. Many of my clients to this day invested in our funds because of the money they made from the same stock. It was truly life changing.

Over to you

Everyone has a greatest trade of all time. 

Mine was buying Fortescue at $4 before it rallied to around $65 before a 10-for-1 split. This was in 2007, when I was just starting out as a wide-eyed rookie analyst. It reached an equivalent of $130 (compared to my pre-split entry price) before I sold out. Even better, some family members came along for the ride. 

What is your greatest trade of all time? Let us know in the comments section below.