On April 1, 1999, Mark Cuban sold a streaming company called Broadcast .com to Yahoo for $5.7 billion. He became a paper billionaire overnight.
Yahoo had paid him in stock, not cash.
He spent the next 6 months trying to figure out how to keep it.
Cuban owned about a third of Broadcast .com going in, which left him holding 14.6 million Yahoo shares worth roughly $1.4 billion at the time. By law, he couldn't touch any of it. The deal came with a standard 6-month lockup that prohibited him from selling or hedging a single share. He had to sit and watch.
What he watched was a tech market getting more disconnected from reality by the week. Companies like Pets .com and Webvan were burning through investor money with no path to profit and trading at valuations that didn't make sense to anyone who looked twice. Cuban looked twice. He decided the crash, when it came, was going to take everything down with it. Including Yahoo. Including him.
So he started planning.
The moment his 6-month lockup ended, Cuban put on a financial structure that's now famous in trading circles. A zero-cost collar.
A collar works like this. You sell call options on your stock, which gives someone else the right to buy your shares from you at a fixed higher price. That caps your upside. You use the cash from selling those calls to buy put options, which give you the right to sell your shares at a fixed lower price. That gives you a hard floor under the downside. The two trades balance each other out so the whole package costs almost nothing to put on, hence the name.
Effectively, Cuban locked in something close to his $1.4 billion. If Yahoo's stock went down, his puts paid out. If it went up, he'd hit the cap and be cashed out at the higher price.
Yahoo's stock kept rising at first. It hit his cap. He got cashed out, in cash, at the high level he'd set. Real dollars, not paper.
A few months later, in March 2000, the dot-com bubble burst.
Yahoo's stock fell from a peak of roughly $237 a share to about $13 over the next 2 years. Almost every other dot-com paper billionaire watched their fortune disintegrate. Many of them had not hedged because they didn't think the prices would fall, or because they thought hedging was a sign of weakness, or because they were emotionally attached to the company they'd just sold.
Cuban kept his $1.4 billion. He once called the trade "one of the top 10 trades of all time on Wall Street."
People remember the sale. They don't remember the collar.
The headline was the $5.7 billion sale to Yahoo. The thing that actually mattered, the move that decided whether Cuban kept his fortune or watched it disintegrate like everyone else's, was a piece of derivative paperwork most people couldn't even read.
Plenty of founders sell at the top. What separated Cuban is that he understood selling was only half the trade. What you do with the money in the moments right after the windfall matters more than the windfall itself.
Cuban put it more simply.
"The whole market cratered and I was protected."
Mark Cuban reveals how he protected himself from losing the 1.4 billion dollars he made selling Broadcast .com to Yahoo
"We sold the company to Yahoo for stock. I had seen stocks go up and stocks go down. I told everybody, there's a good chance the whole thing could crash. Don't be greedy"
"Pigs get fat, hogs get slaughtered. Don't get slaughtered"
"I put together what they call a collar. I sold some of the upside to the Yahoo stock and protected myself by buying puts on the downside"
"Three months later the internet stock market cratered. It was called one of the top 10 Wall Street trades of all time"
"All I had to do was protect it and not get greedy and I'd be set for the rest of my life"