COVID Put Option Profits

Andrew Wilkinson shares a story about how his company bought put options as insurance before the COVID crash in 2020.

"In late January/early February 2020, we started freaking out about COVID while everyone was saying it might be nothing. We were doing stress tests across our businesses, particularly worried about our agency businesses with Fortune 500 customers. We figured they might pay late or some startup clients might go out of business and not pay us at all.

We identified about $5-10 million in revenue at risk, so in late February we bought $500,000 worth of put options on the S&P 500. If the market dropped 20%, we'd get a big payout. These options went from being worth $500,000 to $7 million suddenly.

Chris and I were laughing, never having bought put options before. We sold them and took $7 million onto our balance sheet. Then we looked at each other and thought 'What if this is the worst recession of all time? What if this is 1929 and the market's really going to go down 50%?'

So we took all the money except $500,000 and rebet it - and lost everything because the Fed came in and the markets rebounded. There are two ways to look at this story: either we got hit with gambler's fallacy, or the way I think about it - I lost my premium. I paid for insurance and the bad thing didn't happen, therefore I didn't deserve to get the $7 million payout. The fact that we had that money in our bank account for 5 days is irrelevant."