-Caveat Lector- <A HREF="http://www.zolatimes.com/Constant/ZdailyChart.html">Bull & Bill - Zola Shorts the Dow UPDATE</A> ----- Zola Shorts the Dow on Friday, January 8th, 1999 at 9,643 Daily Update Chart showing Profit and Loss - Last Update: 6:47 AM - Saturday, January 30, 1999 Profit: 19% Dow Down: 246 points Results as of Saturday, January 30, 1999 Total Invested and Put at Risk: $3,500 Current value of investment: $4,150 See below box for full details of how the investment was made Other Articles about History's Biggest Market Blow-off 1999: Surprises Eye of the Storm Stock Market Con-Men Financial Details of How Zola's Short Sale was Effected: Early Friday afternoon (Jan. 8, 1999), 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 1/2".) 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. ----- 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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