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THE GREATEST TRADE OF ALL TIME?

How Mark Cuban Executed One Of The Greatest Trades of All Time

Mark Cuban, a businessman known now for his moves in business and sports, once stunned the financial world with a genius strategy—one that was equal parts defensive and offensive. It was 1999, and Cuban had just made the deal of a lifetime by selling Broadcast.com to Yahoo for a $5.7 billion… only that it was all in Yahoo stock that could not be sold until later down the line. At the time, the dot-com bubble was growing, and stocks were skyrocketing, but Cuban knew better than to let his windfall ride on market euphoria.

Enter his famous options collar strategy…

The Setup: A Deal for the Ages

In the heart of the dot-com frenzy, Yahoo was one of the hottest tech companies around. Their acquisition of Cuban's Broadcast.com made headlines as one of the largest internet deals of the time. 

Cuban's stake in Yahoo stock soared, making him a billionaire overnight. But anyone familiar with the mercurial nature of tech stocks knows that fortunes can disappear just as fast as they were made.

Cuban wasn’t content to merely bask in his newfound wealth. He wanted to protect it. 

His challenge was simple: how to hold onto the new gains of Yahoo stock while hedging against the very real possibility of a market crash.

Enter the Options Collar

Cuban turned to a trading strategy known as an "options collar" to safeguard his Yahoo stock, but it wasn’t just a defensive move. It was a masterstroke in financial strategy. Here’s how it worked:

• Buying a Put Option: Cuban first bought put options on Yahoo stock. A put option is essentially a form of insurance that gives the holder the right, but not the obligation, to sell the stock at a predetermined price (the strike price). If Yahoo’s stock plummeted, Cuban could still sell his shares at that set price, limiting his downside.

• Selling a Call Option: To finance the cost of the put options, Cuban sold call options on Yahoo stock. A call option gives the buyer the right to purchase the stock at a certain price. By selling these calls, Cuban would be forced to sell his Yahoo shares if the stock went above a certain price. In return, he collected the option’s premium from selling the calls, which helped offset the cost of the puts.

This strategy effectively created a “collar”—a range within which Cuban’s wealth could fluctuate. He wouldn’t make any more money if Yahoo’s stock skyrocketed beyond the call option’s strike price, but more importantly, he wouldn’t lose his fortune if the stock crashed. Cuban had capped his potential gains, but he also drastically limited his liability.

The Market Turns

Cuban’s move proved to be nothing short of genius. As the dot-com bubble began to show cracks, many tech stocks started to plummet. 

Yahoo was no exception, as its stock went from a high of around $237 in early 2000 to less than $15 by late 2001. For most investors, this would have been a devastating blow. But not for Cuban.

Thanks to his collar strategy, Cuban emerged virtually unscathed from the crash. The put options he bought protected him from the brunt of Yahoo’s stock collapse, allowing him to sell his shares at a much higher price than the market value. 

The premiums collected from selling call options further cushioned the blow, making his position even more profitable than a simple sale would have been.

The Aftermath

Cuban didn’t just preserve his fortune—he amplified it. By the time the market dust settled, Cuban had safely walked away with his billions, while countless others lost everything. He used his preserved wealth to diversify, invest in a wide range of industries, and eventually buy the Dallas Mavericks.

Cuban’s use of the options collar wasn’t just an example of smart investing. It was a masterclass in thinking several steps ahead, understanding market psychology, and being willing to cap gains in the short-term for long-term stability.

Conclusion: The Power of Risk Management

Mark Cuban’s collar strategy is a testament to the power of risk management. Many investors fall into the trap of chasing endless upside without thinking about downside risk, especially during booming times. Cuban, however, understood that wealth preservation was just as important as wealth creation. His options collar strategy allowed him to protect his newfound fortune at the height of the dot-com boom, insulating him from one of the most catastrophic market crashes in history.

In the world of investing, it’s not just about making money; it’s about keeping it. Cuban’s story is a reminder that in the face of market uncertainty, smart strategies like the options collar can transform potential catastrophe into a winning play. His collar wasn’t just a hedge—it was a shield, protecting the wealth that would go on to fuel his future success.

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