Steve Cohen and Options

Quick, name a billionaire that doesn’t have his or her vocal detractors.

Musk, Gates, De Voss, Walton, Koch, etc. You get the idea; I can throw out a last name and you can think of at least a few things that people hate about them. It comes with the territory.

Even Warren Buffet, who has assiduously cultivated the impregnable aura of the folksy Mid-Westerner who just happened to be a stock-picking savant, has his share of rabid critics. Despite his reputation for modesty and supernatural investing acumen, Buffet has been publicly blasted on a number of issues ranging from his continued investments in oil companies to his support of tax code reform and wealth redistribution.

If there’s a list that ranks billionaires by level of controversy, you will almost certainly find the name of Steven A. Cohen, who currently heads up the hedge fund, Point72 Asset Management. If the name is only vaguely familiar to you, that’s entirely by design.

Point72 Announces New Chief Administrative Officer | Business Wire

He would very much like to only be known as the current majority owner of the New York Mets, or just a wealthy art collector that paid $165 million for Roy Lichtenstein’s “Masterpiece,” $155 million for Picasso’s “Le Rêve” and $141.3 million on Giacometti’s “Pointing Man”, or a philanthropist who has donated over $1 Billion to organizations that support veterans and underprivileged children.

If any or all of these were the only things that you knew about Cohen, he would be quite relieved… because just over a decade ago, he faced the very real prospect of enduring major jail time and being permanently disbarred from the securities industry.

Cohen got his start as a trader with Gruntal & Co. in the 1970’s. He was successful from the jump, earning $1 million (worth $3.8 million in today’s dollars) by his second year, and over $10 million by the time he was in his mid-twenties. Cohen started his own hedge fund, SAC Capital Advisors, in 1992 and it was there that he solidified his reputation as the one of the most formidable and prescient traders on Wall Street. Terms used to describe him during that period include, “trading savant”, “genius”, “one of the best investors who every lived”, and “the Michael Jordan of trading.”

It was said that he achieved returns “at a level unseen and previously unfathomed – better than Bernie Madoff promised but with real money behind them.” His clients were not the only ones that did well; instead of the usual 20 percent of profits in fees that normal hedge funds charged, SAC Capital demanded, and got, a 50 percent fee on returns. While most hedge fund managers of the period got very rich, Cohen was in a whole other class – it was reported that he earned over $1 Billion in compensation several years during the height of SAC Capital’s run. Still, high net worth and institutional clients could not throw money at him fast enough and he grew assets under management at SAC Capital to around $15 Billion after 20 years.

Cohen’s genius was an uncanny ability to anticipate when important news was going to come out about stocks, and then correctly call both the results and the direction that stocks would move. “Cohen excelled by placing significant bets on small changes in stock prices, usually around key events like an earnings announcement. In order to make big money, the bets had to involve huge amounts of shares, amplifying the risk” was how it was explained in a 2020 profile in The New York Times.

And then it all came crashing down: in June of 2013, the U.S. Attorney charged Cohen and SAC Capital with “systematic insider trading.” It was over very quickly, and before the year was out SAC Capital took a plea deal that required them to admit guilt, shut down operations, return all client assets, and pay a whopping $1.8 Billion fine. While one SAC Capital portfolio manager was sentenced to nine years in jail, incredibly, Cohen himself escaped all other personal or financial liability.

He opened Point72 Asset Management as a family office in 2014, and by 2018 he was taking outside capital to invest. So, despite the admission of guilt and controversy at SAC Capital, Cohen’s current firm manages north of $30 Billion in financial assets, and the man himself is worth between $15 and $20 Billion according to Forbes – both figures are multiples of what they were at the height of SAC Capital. This turn of events was so astounding that it became the basis for the television show Billions, about a dogged district attorney’s mostly futile efforts to nail down a charismatic, if ethically slippery, hedge fund billionaire.

In real life, as they say, Cohen not only beat the government’s best efforts, he’s come back stronger than ever. In 2020, he became the controlling owner of the New York Mets, purchasing the team in a deal that valued the club at $2.4 Billion. For the sale to go through, he needed to pass Major League Baseball’s stringent vetting process and the approval of at least 23 of the other 30 MLB team owners. In the end, he sailed through the process and was welcomed with open arms.

So, how do you manage a comeback of these epic proportions?

Well, if you’re like Steven Cohen, and you’re working with a portfolio of this size, you need a good slug of large cap growth stocks. Here are Point72’s top 10 stock holdings which collectively accounts for ~12% of the entire securities portfolio, according to their latest 13F filing.

  1. Amazon
  2. Broadcom
  3. Microsoft
  4. AT&T
  5. FedEx
  6. Coca Cola
  7. Paypal
  8. Fox Corp.
  9. Arista Networks
  10. Edwards Lifesciences

But what really sets Cohen apart is his evident and enthusiastic use of options to enhance the returns in his portfolio. We know this because in Point72’s 13F filings with the SEC, they list over 700 different option positions, like call options on the majority of his top 10 holdings, including Broadcom, Arista Networks, FedEx, Paypal and Edward Lifesciences.

While 13F disclosure rules intentionally keep specific option strategies obscured, we can be sure that Cohen is using options to enhance his portfolio returns in at least three different ways:

  1. To leverage the returns of his highest conviction ideas – through naked call buying and bull spreads on stocks he is bullish on, and put buying and bear spreads on stocks he views to be ripe for corrections;
  2. To generate additional income and yield on his portfolio, and potentially decreasing his cost basis on stocks that he owns or wishes to acquire – through the selling of covered calls and naked puts;
  3. To act as a hedge against temporary losses in his portfolio – he owns puts on multiple stocks he owns, including Coke, FedEx, Edwards LifeSciences and Fox. And his single largest position? Puts on the S&P 500 index with a notional value of over $1 Billion.

While we can’t help you become the next “Michael Jordan of trading”, we can get you in the same gym as him. SSI: Ultra is a service that shows you how and when to deploy these and even more advanced option trading strategies in your own portfolio. As Stephen A. Cohen knows, every little bit of an edge helps!

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