- Probability of Bernanke reappointment by 2 February: 90.3%
- Dow if Bernanke reappointed: 10,404
- Dow if Bernanke not reappointed: 11,755.6
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.
Hi Eric,
ReplyDeleteI 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?
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.
ReplyDeleteSuppose 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.