I was watching CNBC Thursday when an interesting guest presented what may be the “Big Short” incredible play of 2011-2012. Bill Ackman, the founder of the Pershing Square Hedge Fund presented his thesis on a currency play that will pay out at 100 to 1 if it occurs. It’s a binary trade where he’ll lose his investment completely if it fails to come to fruition, but a 10,000% return on even a small portion of his fund’s total capital could boost him into a 3-4 digit return for investors in the next year. Here’s the premise broken down methodically as he explained it:
- The Hong Kong Dollar has been pegged to the US dollar for decades. Hong Kong has altered their peg multiple times throughout their history and now is an optimal time for them to do so.
- Political and Financial forces may push them to do so.
- Unemployment is low, inflation is high and civil unrest may force the financial ministry to repeat prior delinking of currency and commodity pegs. The current economic situation is untenable, so his thesis is that it is a matter of WHEN, not IF.
- He anticipates the currency should either a) float or b) be reset at a ~30% offset and then re-pegged.
- He has bought numerous out of the money options at VERY LOW premiums because this play has not been anticipated or attempted by any other mainstream investors. Therefore, if the currency is allowed to appreciate, boom!
- He has purchased both 12 month and 18 month options, the longest allowed. Because of the combination of cheap options and his anticipated 30% move, the play will pay off at 100 to 1 or more, making it his most prolific trade ever.
- It was interesting to hear that this was fully researched and enacted without even making a trip to Hong Kong. He said he didn’t want to tip off the market to this trade. The could be the Soros moment (Black Friday) of 2011.
I’ve been on the winning and losing end of multiple options trades, including complex options like shorting the US Treasury with leveraged ETF options (that’s a mouthful…and the trade’s well into the money right now by the way, even though Treasuries continue to push yields lower driving mortgage rates to 60 year lows!).
Have You Ever Enacted a Similarly Complex Trade?
Would You If You Had an Incredible Thesis and the Payoff Was Huge?