Not many people know you can place a bet on the Dow Jones Industrial Average. You can gamble whether it goes up or down. For example if you believe the Dow is going to go up then you can purchase a product called a Dow Future and take a position called “going long”. If you believe the Dow is going to go down than you can take a position called “going short”. Like all bets if you guess right you win; if you guess wrong you lose. Which means if the Dow goes up or down you can make money.
In 2008 the Dow reached 14,000. March 13th 2009 the Dow closed at 7,170. This is a difference of almost 7,000 points. What does this mean in possible dollars if one took a short position over this time period?
For example, let’s say we can make a $10.00 bet the Dow is going to go down, (the short position). This means for every one point drop in the Dow you win $10.00. So if the Dow goes down 100 point you win $1,000. Conversely, if the Dow goes up 100 points you lose $1,000. In the above example a drop of 7,000 points, the dollar equivalent would be $70,000.
There is a caveat to this. Futures contracts are market to market. This means the change in the value with respect to your account is based on the daily experience. Therefore the account is reconciled at the end of each trading day. Put more directly in the case of our $10.00 bet, the money will be added or subtracted from your account at the end of the day.
In the event the money is subtracted you will need to have at a minimum of a $1,000 in your account at the end of the day. Some Future Brokerage Firms are going to require you maintain a certain minimum balance at all times. Once it looks like you are going to drop below that minimum balance. They reserve the right to suspend trading on your account. So now, in the case of the Dow dropping 7,000 points over a year’s time, to eventual net the $70,000 your bets will have to be very good on a day to day basis.
Keep in mind you can take a long or short position on S&P, NASDAQ or individual stocks too. But it is volatility that drives the attractiveness of the futures game. For this reason many prefer the Dow.
To this respect the most popular futures for the intermediate investor are Chicago Board of Trade, CBOT-mini sized Dow ($5), DJIA Futures ($10) and Big Dow DJIA ($25). However, if you are new at this, the suggestion would be to stick with the $5.00 bets. If you want to be more risky you can always double or triple down on any given bet.
There is another thing worth noting. Just like all gambling the cards are stacked in the house’s favor. When you make a bet there is at least a 10 minute data driven delay before you see the actually results of your placement. There are other big firms trading and members of the Chicago Mercantile who have paid big bucks to actually do real time trading. So they get to see your bet before it becomes actualized in your data. The question is what type of disadvantage does this put you at?
For the high rollers who can control late rallies, daily or weekly trends it could be costly to you. To play this game, it means in all cases you need to educate yourself about daily and weekly trends. The market historically does predictable things on Mondays, Wednesdays and Fridays. It also tends to rally in the late day and is said to spring in the Spring and fall in the Fall. In all these matters it is in your best interest to become familiar with stable market trends. Also keep in mind by the market it is meant the Dow.
It is also important to find a trading house that is not going to be so expensive. Some charge as little as $9 to $13 dollars for a change in position. Keep in mind opening and closing for the day is the equivalent of two changes. It is not uncommon for an investor depending on the sums of money being played with to change positions 2 to 3 times during the day until they figure out where the trend is headed. Then the investor stays put. Standing Pat or as it is called riding the market or as gamblers like to say, “Let it ride”.
Some of the more popular Future Brokerage Houses are:
Man Financial Inc
E*Trade Options
LaSalle Futures Group
OptionXpress
There are a number of firms but beside the price per trade be cognizant about what real time tools they have available to help you. Trend data will prove to be very helpful and projection algorithms in a stable market can be invaluable. Also, be concerned about whether they have any free online tutorials.
You are going to want to make the trades yourself. If you leave it in the hands of the firm this is going to cost you extra. In some cases it may be worth spending the extra money to have an expert make the calls for you.
Interview a number of the firms’ agents asked them to show you their success rate. Grade them like you would anybody who you would trust with your money. “A” for those who are correct 90%+ of the time, “B” for those who are correct 80%+ of the time and “C” for those who are correct 70%+ of the time, anything less than this is a failure.
Above all keep in mind you can lose big as well as win big. There is an old adage about gambling in the Futures Market. “If you can not afford to lose all the money you are gambling with, then you should not be in the game.”
