I can tell you exactly how to play a drop in the DOW. You can buy puts on the average for December 2002 at a strike price of 140, symbol YDXXJ. The latest quote is about 27.75, which means that for $2,775 you have the right to sell the Dow average as if it were at 14,000. Since it is presently at 10,466 these puts already have a built in profit or value of $3,534. Providing the Dow is no higher than it now is, in December 2002.
As I need not say, one is not obligated to hold the put until that time. Now I am venturing into the pie-in-the-sky scenario, but if the Dow should sink to 8,000 and remain near that for some time, each of those puts would be worth $6,000.
If anyone can see anything wrong with my valuation of the Dow puts, I sure would like to know about it. The only way I can explain their price is that there are some terribly overconfident people who believe the Dow will be in the range of 13,000 and higher some time in the next eighteen months. |
