-Caveat Lector- <A HREF="http://www.zolatimes.com/V3.2/pageone.html">Laissez Faire City Times - Volume 3 Issue 2</A> The Laissez Faire City Times January 11, 1999 - Volume 3, Issue 2 Editor & Chief: Emile Zola ----- Bull and Bill by Zola In recent weeks we’ve been mouthing off a lot about stock market mania. Of course, opinions are like assholes: everyone has one. So we decided to take the bull by the horns, so to speak, make a representative investment with real money, and let readers voyeuristically cheer or jeer as the case may turn out. Early Friday afternoon (Jan. 8), we placed a limit order to buy a March 95 Dow Jones put at 35.00. The order was executed in the final 30 minutes of trading, when the Dow surged to close 105 points higher for the day and 462 points higher for the week. Let me explain what all this means. We are short the market. The put gives us the right to go short one March Dow Jones futures contract. The futures contract itself gives a cash flow of $10 for each Dow point. If the Dow goes up 100 points, a long position in the future gains $1000, while a short position loses $1000. If the Dow goes down 75 points, the short side of the future gains $750, while the long side loses $750. The March Dow Jones future closed on Friday at 9727. A March put may be exercised into a short position in one March Dow Jones future. The "95" strike price of the put means that the future’s contract will be opened at a futures price of 9500. If the put had been exercised at the end of day Friday, the resulting short futures position would have generated an immediate loss of $10 x (9727-9500) = $2270. Obviously you would exercise the put only if the market price of the March future were lower than 9500. Our limit price of "35.00" meant that we were willing to pay $3500 for the put. (If you read Barron’s, which hasn’t yet discovered the decimal system, the same price would be quoted as "3 ".) As the Dow goes up, the value of the put goes down, and we were able to buy the put at that price at Friday’s end-of-the-day surge. Now, let’s hypothetically say that we keep this put until it expires the third week in March. Certainly we won’t be trading in and out of the option. The Dow Jones futures contract is new, but has already become fairly liquid. But there is no liquidity in the Dow Jones options. When we placed our limit order, there had been no trades in the March 95 put so far that day. Which means that we are probably dealing with a single marketmaker, and while we haven’t researched the issue, we suspect that his spreads are wide enough to drive a truck through. (So if he sold us the option at $3500, he probably calculated it was only worth $3400.) So suppose we hold this put to March expiration. The March future, which currently trades at a premium to the Dow Jones average (the "cash" index), will gradually converge down to the level of the Dow Jones average itself. (The current futures premium above the cash index roughly represents the rate of interest on the cash index minus the dividend yield on the Dow Jones stocks, adjusted for the fraction of a year until expiration.) So if the Dow Jones is trading below 9500, we will exercise the option, and receive the value of the futures position, which would be $10 x (9500 minus current level of the Dow). If the Dow Jones is at 9150, we would get back our original investment: $10 x (9500-9150) = $3500. (Actually, we will need a few more Dow points to pay commissions: about 3.5 points for the option commission and 2 points for the futures commission.) Ignoring this minor detail, anything below 9150 makes us a profit. On the other hand, if the Dow races to 10,000 and beyond, or simply closes above 9500 at option expiration, our option will expire worthless. But the good thing about it is we will not be getting margin calls: our exposure is limited to the $3500 we’ve already paid. Speaking of stock market, the price/earnings ratio on the S&P 500 is now 38. We thought it was rich at 19. But, as they say, the rich only get richer. (Unless you are a partner at Long Term Capital Management, in which case the value of your equity might fall from $1.5 billion to $30 million in the space of a couple of months.) The stock spectacle these days is as entertaining as the impeachment trial of Bill Clinton. Who would have ever imagined the unlikely coalition of Ted Kennedy and Phil Gramm? They spearheaded the compromise plan that received the unanimous support of all 100 Senators for the form the impeachment trial would take. We did a little research and verified that Ted Kennedy’s FBI file was one of those acquired by the Clinton White House. Kennedy clearly believes in Hillary Clinton’s social (i.e. socialist) agenda, but it is apparent there is little love lost between the Clinton crowd and the Kennedys. In fact, Clinton has few friends in the Senate. We believe that the continued assertion that "the votes are not there" for impeachment is premature. Gregory Craig, special White House counsel, said "we plan to present a vigorous, successful and complete defense" on behalf of the President. This will contrast with the lackluster, unsuccessful, and incomplete defense they presented in the House. Meanwhile, if news reports are to be believed, Hillary Clinton is planning to divorce Bill and run for Senator of New York. Sounds good to us. Who could be more representative of New York than Hillary Clinton? But at least Danny Williams will not form part of her decision. News reports on Saturday were saying that the Star’s DNA tests were negative with respect to Bill Clinton being Danny’s father. So Danny will have to continue his search for a daddy, and Bill Clinton’s approval rating will not rise to 100 percent. -30- ----- Disclaimer The Laissez Faire City Times is a private newspaper. Although it is published by a corporation domiciled within the sovereign domain of Laissez Faire City, it is not an "official organ" of the city or its founding trust. Just as the New York Times is unaffiliated with the city of New York, the City Times is only one of what may be several news publications located in, or domiciled at, Laissez Faire City proper. For information about LFC, please contact [EMAIL PROTECTED] Published by Laissez Faire City Netcasting Group, Inc. Copyright 1998 - Trademark Registered with LFC Public Registrar All Rights Reserved ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! 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