Tuesday 26 January 2010

Bernanke Dow inversion

Or at least those were the prices before I started shorting Dow if Bernanke not reappointed.

Come on, traders. It's dead simple to put these prices into a little excel spreadsheet that spits out the conditional prices for the Dow. Looks like somebody bid up the price of US.BNKE.2FEB without making the simultaneous play against US.NOTBNKE.DOW . Time for me to short Bernanke's reappointment before 2 Feb while shorting the Dow in the case that he isn't reappointed. If he's reappointed, I take money from the Dow short; if he's not reappointed, I take money from the Bernanke short.

2 comments:

  1. Hi Eric,

    I thought I knew what I was doing on this stock, but the more I think about it the more confused I become.

    I have been shorting both US BNKE 2 Feb, and US NOT BNK DOW.

    There is an obvious short when the condiitonals suggest over 11500, as it can't pay out above that. But it seemed to me there was a short merely because people were estimating a way higher dow price if he was not reapponted, which is the basis of which I shorted.

    Now I'm worried I've screwed up badly. If Bernanke is reappointed, and I have shorted both, won't it cost me much more through my losses on US BNKE 2 Feb than my gains on the other, given that I have shorted both in equal quantities?

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  2. I was never thinking about the moves as hedges -- I've been trying to play risk neutral, so I haven't worried so much about correlated risks.

    Suppose that you shorted 100 US.BNKE.2FEB at $0.95 and you shorted 100 US.NOTBNKE.DOW at $0.05. If Bernanke is reappointed, you lose $5 on your US.BNKE.2FEB contracts (they paid you $95, you pay them $100). Your DOW contracts close at zero (as BNKE not reappointed), so you gain the $5 you'd been paid for those contracts. In that case, they wash. Working it out for different prices is left as an exercise for the reader.

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