Profile | He made 1 billion in just 3 months using options

In this article, we will discuss the key factors that control the financial market, as well as the strategies employed by George Soros, a renowned investor.

According to Soros, mathematics alone cannot control the market, but rather, it is the psychological factors that play a crucial role. Understanding the instincts of the masses and knowing when and how they gather around certain stocks, currencies, or commodities is essential for successful investing.

In the summer of 2012, when Japan, hit by a magnitude 9 earthquake, began importing a large amount of crude oil, Soros predicted that the Japanese yen would depreciate and actively sought opportunities to short it.

In October 2012, Soros saw an opportunity when he learned that Shinzo Abe, who was most likely to be elected as the Prime Minister, was eager for further quantitative easing of the yen. At the same time, he noticed a significant amount of Japanese funds being withdrawn from high-yield assets denominated in Australian dollars and brought back to Japan. He felt that the timing was right.

The elites on Wall Street naturally did not miss this golden opportunity and joined the ranks of shorting the yen and going long on the Japanese stock market.

However, in the face of the same market trend, only true masters can fully enjoy this feast. One such master is the famous George Soros.

To raise a substantial amount of capital for his positions, Soros sold a large number of stocks. According to documents from the U.S. Securities and Exchange Commission, Soros sold shares of General Motors and General Electric. In the previous quarter, his fund sold 1.1 million shares of LinkedIn, 260,000 shares of Amazon, and 2.5 million shares of Groupon.

The main strategy of the Soros Fund was to buy a large number of derivative products betting on the depreciation of the yen and the rise of Japanese stocks. It is understood that his main short yen position was concentrated in knock-out options with a strike price range of 90-95 yen (also known as barrier options, which only make money when the yen falls significantly but become void when it falls below a certain level).

Why did Soros choose knock-out options instead of directly selling forex futures to short the yen? Because these options were extremely cheap, allowing Soros to achieve high returns with a limited amount of risk.

At that time, Soros spent only about $30 million to purchase these options, which accounted for only 0.15% of the Soros Fund's total assets of over $20 billion. However, his net profit from shorting the yen was $1 billion, with a return rate of 33 times, while the yen only fell by 10% during the same period.

In addition to using options to short the yen, Soros also leveraged his positions to buy a large amount of Japanese stocks, which is a common strategy for him. Soros believed that the only way for Japan to solve its economic problems was through currency depreciation, which would lead to a temporary boom in the stock market.

At that time, Japanese stocks accounted for 10% of the company's internal investment portfolio. By the end of 2012, the Nikkei 225 index had risen by about 33% from its low point, allowing Soros to make a substantial profit.

This article is a compilation of insights from Qilehui. Soros' successful shorting of the yen is not simply speculation, but rather based on thorough research and careful consideration of the situation, taking into account the risks involved. His investment vision and courage are worth learning from.

In addition, data shows that Soros' famous Quantum Fund managed over $20 billion in assets at the time, earning a net profit of $5.5 billion in 2013, once again becoming the most profitable hedge fund. Among this, $1 billion in profits came from his strategy of shorting the yen in the first two months of 2012.

Faced with a one-sided market movement of 10%, an ordinary person might choose to convert 10 billion yen into US dollars, potentially earning 1 billion, but also risking 1 billion.

An experienced investor might consider futures, using approximately 1 billion as margin to potentially earn 1 billion, but the risk remains high. When you learn to buy out-of-the-money options with a small amount of capital, you understand risk management and take another step towards becoming an expert.

In fact, what is most surprising is that Soros' team achieved these profits using only around $30 million, which is equivalent to a 30-fold increase in capital!

What they actually bought were a large number of reverse knock-out options with different strike prices, which were cheaper than out-of-the-money options. Even if all of these options were to expire worthless, it would not affect the overall situation. However, if some of them were correct, substantial profits would be generated. Of course, this requires a more accurate grasp of the final price trend.

This is similar to guessing the score in a World Cup group stage match between Italy and Uruguay. An ordinary person may only guess that Uruguay will win unexpectedly, which is easy to guess, but to make big money, a large amount of capital is needed. An expert not only predicts the outcome, but also predicts the goal difference.

Soros, on the other hand, is like betting on the exact score with a small amount of money. Although it is more difficult, he can buy multiple outcomes (even betting on Suarez's old injury recurring on the field). Once one of these outcomes is correct, high returns can be achieved. The biggest advantage is that both the investment and the risk are greatly reduced.

Therefore, George Soros' story gives us an important revelation: options are not gambling tools, but rather advanced insurance.

Many people often simply compare options to lottery tickets, but the story above shows us that true experts do not rely on reckless gambling to make money. Instead, they conduct thorough fundamental research and analysis to discover potential investment opportunities, and then consider how to choose the most powerful tool and achieve their goals at the lowest cost, and that powerful tool is options.

The high leverage of options allows experts to save more capital to implement more meaningful strategies.

Therefore, comparing options to lottery tickets is not very appropriate. The most appropriate analogy for options should be advanced insurance. Ordinary insurance can only be held until maturity, while options can be traded on a T+1 basis and their prices are constantly changing. In fact, the vast majority of options investors do not hold them until expiration. Moreover, ordinary insurance often only covers the risk of "downside", while options can cover not only "downside" risk but also "upside" risk, bringing more possibilities to our investment portfolio.

Therefore, to make good use of options, we can search for trends or risks that are often overlooked by the market but are "likely" to occur. It requires a more detailed analysis of market indices or individual stock trends, rather than simply analyzing whether they will rise or not.

With the high-end weapon of options, fully utilizing its "insurance" attribute will greatly enhance our investment process, providing continuous opportunities.