Jamie Mai is a hedge fund manager who has generated world-class returns for Cornwall Capital, a fund he founded after studying history in college. Mai returned 42% per year for investors (net of fees) during the fund’s first nine years. $100,000 initially invested in Mai’s fund would’ve been worth $2,347,000 by the end of year nine.

Explore more about [ Put keywords here 1 by 1 ] He is a hedge fund manager who has generated world class returns for Cornwall Capital, a fund he founded.

Jamie Mai used multiple trading strategies to generate the fund’s returns, but they all shared a common thread. Jack Schwager explains it in his book Market Wizards (emphasis mine):

“The one unifying characteristic virtually all of Cornwall’s strategies share is that they are structured and implemented as highly asymmetric, positive skew trades—that is, trades in which the upside potential far exceeds the downside risk.”

The goal was to risk $1 to make $10. Mai understood that most of his bets would lose, but over time, the size of his winners would more than make up for those small losses.

Mai’s favorite way of expressing this strategy was through long-term, deep out-of-the-money options or DOTMs. For example, if a stock trades at $10 in 2001, Mai would buy the $40 calls dated for 2005. (If you want to brush up on options and volatility, we have a detailed report you can read here.)

DOTMs allowed Mai to risk small amounts of money in highly asymmetric bets. Here’s how he explains it in the book (emphasis added):

“Options are priced lowest when recent volatility has been very low. In my experience, however, the single best predictor of future increases of volatility is low historical volatility. When volatility gets very low in a market, we consider that a very interesting time to start looking for ways to get long volatility, both because volatility is very cheap in an absolute sense and because the market certainty and complacency reflected by low volatility often implies an above-average probability of increased future volatility.”

In layman’s terms, Mai used DOTMs to bet that a stock would go from barely moving to moving wildly higher or lower.

To explain Jamie Mai’s trading strategy, here is a breakdown of three specific trades he made to generate outsized profits:

Jamie Mai’s Trade Examples & Strategy Explained:

Trade #1: Altria (MO) Calls
In 2003, Altria, a major tobacco company, faced a wall of rating agency downgrades. This was due to negative developments in the multiple class action litigations against it.

These cases carried the potential for large settlements in the billions of dollars. There was also the risk of setting a favorable precedent for future plaintiffs. This created significant uncertainty for Altria — bankruptcy was on the table.

Despite this uncertainty, Mai saw an opportunity in the out-of-the-money call options for Altria. So he placed his bet:

“So the first thing we checked was whether the Altria options still assumed a normal probability distribution, despite the presence of a bimodal event. Sure enough, the Altria option prices still implied a normal distribution, which meant the out-of-the-money options were way too cheap.

Trade #2: Capital One Financial (COF) Calls
In 2002, Capital One (COF) had significant exposure to the subprime market. This was fine at the time because everyone assumed COF was a rock-solid business. But then news broke that regulators forced COF to raise its reserves and institute more stringent lending processes.

This news cast doubt on the company’s previously held reputation as a leader in subprime credit risk assessment and resulted in a significant decline in its stock price.

Despite this bearish sentiment, Mai saw an opportunity in COF’s out-of-the-money options market. He believed that the market overreacted to the news and that the calls were significantly underpriced.

Trade #3: South Korean Stocks
South Korean stocks were dirt cheap in 2003-2004. Even though South Korea had done a better job than many of its Asian neighbors in adopting fiscal and market reforms after the 1997 currency crisis, its stock market continued to languish. It didn’t make sense, so Mai dug deeper.

Jamie Mai personally visited South Korea, connected with local buy/sell-side analysts, and had an interpreter translate Korean financial statements. That’s when Mai discovered just how cheap some of these stocks were. Here’s how he explains it from the book (emphasis added):

“There were companies with market caps of $300 million, no debt, and $550 million cash on the balance sheet, which was expected to increase to $650 million in the following year. In this case, there was tremendous asymmetry simply because these companies had nowhere to go but up.”

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