From: floydb@rpi.edu
Subject: Re: cs101 student (was: Oil Futures)
Date: Mon, 14 Dec 1992 18:56:44 GMT

In article <1992Dec14.155738.6694@mobil.com> etpeters@dal.mobil.com (E. T. Peterson(Eric)) writes:
>In article <Bz60nA.Dts@news.cso.uiuc.edu>, cs101a64@ih-nxt04.cso.uiuc.edu (cs101 student) writes:
>
>|> You can also lose a Perot-size fortune in the futures market.  The futures  

>*********************************************************************

I concur with Eric and would hope that the "cs101 student" puts a sock
in it or reads a few good books before making his next (otherwise
totally uninformed) contribution.

You don't dissuade individuals from entering into these markets, which
is apparently your intent, buy prophecying doom and gloom for even
speaking their name. You merely profess your ignorance (implicitly and
explicitly) and add noise to an otherwise low-noise discussion group.

Opinions are easy to offer, as are mine, so I will end with a good worst
case scenario that will end in doom-and-gloom. I hope you see from this
example that one would have to try very hard to become one of the 
"homeless"...


Presume you are a person with a job and enough money to be approved 
for a futures account (not all individuals instantly qualify).

Further realize that the most risky situation any investor can get into
is an unhedged investment with infinite potential loss (theoretically).


The most common "infinite" loss investments are naked-put and nake-call
writing against stocks/equities.

Herein one sells the option to sell or sells the option to buy a fixed
number of shares at a fixed price. Similarly, one may short-sell stock
which is selling stock you don't owe with the hope that you will be able
to buy it back at a lower price (sell-high buy-low vs buy-low sell-high
(and corrallaries in the futures markets).

In any of these situations the investor is betting that the underlying
instrument of investment will increase or decrease in value during a 
specified period of time (explicitly or implicitly, short-sellers don't
often plan on holding a position indefinitely). 

If I wrote/sold IBM Dec '92 Puts at $130 during 1991 I would be in a
particularly bad financial position right now, presuming I was dumb
enough to maintain the position throughout the intervening months 
(unlikely). Ignoring the volatility and time value of the options
(not a real world presumption - but these would not make the situation any
better) I might have received $500 per contract ($5/share) when I wrote
the options, when the stock was at/or around $130-$135/share on the
NYSE. Today, with IBM at or around $60-$70/share the underlying has
decreased in value by about 45%-55%. The options, however, are minimally
worth $7000-$5000. A put buyer would have increased their investment
100 times. The writer/seller would now have to buy IBM stock at $130
per share in a market where it is worth only $60-$70. 

100 shares per contract * $130/share = $13,000 expense - $500 income = 
$12,500 dollar loss for the life of the contract. You could then turn 
around and sell the stock at market and reduce your net loss.

It would not be uncommon for a speculator to hold/sell several contracts
for any number of stocks. Where the option buyer can lose only 100% of
the amount invested (as with any other purchase of goods or financial
instruments) the seller (unhedged) can lose many times their net worth
if they try hard. The secret of leveraging without hedging.

In the above example the investor only lost multiples of $13,000 (+-$500),
but this may represent 100 times their cash balance ($1,300) before the
transaction.

The moral of the story is that you can lose big in futures, options,
stocks, commodities, realestate, etc. Ignorance, professed or otherwise,
will increase your chances of doing so where knowledge can only limit
your exposure.
 
2 cents worth
 
barry