Capital One

A passgae from Michael Lewis' book, The Big Short:

"Suddenly [in mid 2002] the market feared that Capital One wasn't actually smarter than anyone else in the industry about making loans but simply better at hiding losses. The regulators had discovered fraud, the market suspected, and were about to punish Capital One. Circumstantial evidence organized itself into what seemed like a damning circumstantial case, the SEC announced that it was investiogating the company's CFO, who had just resigned, for selling his shares in the company two months before the company announced its dispute with regulators and its share price collapsed."

Lewis cites this as a good example of the sort of situation in which a creative options play can flourish. A large move in stock price, one way or the other, seemed inevitable to Lewis' protagonists. With options, one can in essence bet against stasis, or against the minor incremental moves that cluster near the top of the Bell curve. One can bet in favor of one or the other tail of the curve, indifferent to which. This is precisely what Jamie Mai and Charlie Ledley did, quite successfully, in their alter ego as Cornwall Capital.

"Soon after Cornwall Capital laid their chips [pedantic editor -- "its chips"] on the table, Capital One was vindicated by its regulators, its stock price shot up, and Cornwall Capital's $26,000 options position was worth $526,000. 'We were pretty fired up,' says Charlie."

This is a small point within the big picture of Lewis' book, but one I thought worth preserving here.