Options trading: how millions earn (part 2)

"Cornwall Capital Management quickly bought 8,000 LEAPs. Their potential losses were limited to the $26,000 they paid for their option to buy the stock. Their potential gains were theoretical y unlimited. Soon after Cornwall Capital laid their chips on the table, Capital One was vindicated by its regulators, its stock price shot up, and Cornwall Capital's $26,000 option position was worth $526,000. «We were pretty fired up, » says Charlie.
«We couldn't believe people would sell us these long-term options so cheaply, » said Jamie. «We went looking for more long-dated options. »
It instantly became a fantastically profitable strategy: Start with what appeared to be a cheap option to buy or sell some Korean stock, or pork belly, or third-world currency—really anything with a price that seemed poised for some dramatic change—and then work backward to the thing the option allowed you to buy or sell. The options suited the two men’s personalities: They never had to be sure of anything. Both were predisposed to feel that people, and by extension markets, were too certain about inherently uncertain things. Both sensed that people, and by extension markets, had difficulty attaching the appropriate probabilities to highly improbable events. Both had trouble generating conviction of their own but no trouble at all reacting to what they viewed as the false conviction of others. Each time they came upon a tantalizing long shot, one of them set to work on making the case for it, in an elaborate presentation, complete with PowerPoint slides. They didn't actually have anyone to whom they might give a presentation. They created them only to hear how plausible they sounded when pitched to each other. They entered markets only because they thought something dramatic might be about to happen in them, on which they could make a small bet with long odds that might pay off in a big way. They didn’t know the first thing about Korean stocks or third world currencies, but they didn’t really need to. If they found what appeared to be a cheap bet on the price movements of any security, they could then hire an expert to help them sort out the details. “That has been a pattern of ours,” said Jamie Mai. “To rely on the work of smart people who know more than we do.” They followed their success with Capital One with a similar success, in a distressed European cable television company called United Pan-European Cable. This time, since they had more money, they bought 5500,000 in call options, struck at a price far from the market. When UPC rallied, they turned a quick $5 million profit. “We’re now getting really, really excited,” says Jamie. Next, they bet on a company that delivered oxygen tanks directly to sick people in their homes. That $200,000 bet quickly turned into $3 million. “We’re now three for three,” said Charlie. “We think it’s hilarious. For the first time I could see myself doing this for a really long time”


Back to current situation with BlackRock Inc. In order to earn from information they have, the company bought so-called straddle option (an options strategy in which the investor holds a position in both a call and put with the same strike price and expiration date, paying both premium). Some details on this deal. Straddle is concluded for 6 months (it means that this period covers the next 4 meetings of the Bank of England). The investor will pay £ 50,000 for a contract worth £ 1 million. According to Bloomberg's calculations, it will be executed if the pound reaches the following borders: below $ 1.34 and above $ 1.48.