Shorting the Dow?

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SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
Joined: Feb 11 2009
Posts: 2252
Shorting the Dow?

I found a thread here

http://www.peakprosperity.com/blog/more-fuzzy-numbers-durables/15630

and in post #11 bearmarkettrader mentions using the "DXD" to short the Dow.  As a total neophyte to trading, can anyone tell me anything about this fund (described as "ProShares UltraShort Dow30")?  

You buy this and if the Dow goes down, the fund goes up?  

I guess my question is:  if I'm figuring the Dow is due to drop (following this l'il suckers rally) then how would I short the market without buying specific stocks?

Thanks in advance!

Viva -- Sager 

Jarhett's picture
Jarhett
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Posts: 132
Re: Shorting the Dow? SAGER

SAGER

 If you bought shares of DXD, DXD would gain money as the Dow dropped, so you wouldn't be shorting anything.  If you wanted to short the Dow I recommend shorting DIA, which is an Exchange Traded Fund (ETF) that tracks the DOW.  Funds like DXD are for people who do not like to short, or do not know how to short (or can't short because they are in a IRA, 401K).  Many people see shorting as being negative, like the guy at the craps table who is betting that the shooter will roll a seven, so these funds help these people out.  If I were you I would look into buying put options on the DIA, which tracks the Dow.  Shares of DIA are trading for $80.16 right now, to buy a hundred shares of DIA to Short, would cost you $8,016.  However for $978, you can buy a December Put, that controls a hundred shares of the DIA, and as the Dow drops your PUT becomes Worth More.  For Example if you bought a December 2009 Put when the DOW was at 12,000, it would of cost you around $900, to buy a December 2009 put at 12,000.  Now that put option is worth $5,600.  If you bought one hundred shares of DIA to short at 120 (for when the DOW was at 1200) it would of cost you $12,000 for one hundred shares, and you would have made $3,984 (up to today).  So I would rather pay just $900 to make $5600, but that is just me (imagine if you had bought 10 puts for $9000, they would be worth $560,000 right now).  If you are more comfortable with stocks than shorting is an important tool to use.  People say the DOW is going to drop to around 4,000 which is the same difference as between when the DOW was at 12,000 and right now where the Dow is at 8,000.  Before a 4,000 point drop in the Dow could have made you around a half a million if you bought 10 Puts, and there is no reason why this cannot happen again.  

* Disclaimer you are an independent person do not listen to me do your own research, it is not my fault if you lose all your money and the Dow returns to 15,000.  However if you do make half a million I will send you my address for a thank-you note.  

Subprime JD's picture
Subprime JD
Status: Platinum Member (Offline)
Joined: Feb 17 2009
Posts: 562
Re: Shorting the Dow? SAGER

 Hi guys

You can short the dow buy shorting DIA itself and by purchasing put options on DIA. However, by buying DXD you are getting more bang for your buck as the percentage gains are huge. Remember, DXD moves 200% against the daily percentage gain or loss on the djia. So, if the dow loses 2% then DXD gains 4%. If dow gains 2% DXD goes down 4% for that day. Now remember, these leveraged etf's have decay that its into them. These get lower and lower as time goes on because of the daily compounding.

 

Heres an example:

 Dow at 8000     Dow gains 2%, ends day 8160.

DXD at 80         Since dow gained 2% dxd loses 4%, dxd at 76.8

 

Dow at 8160. Dow drops 2%. Dow ends day at 7996.2

DXD at 76.8   Since dow lost 2% dxd gained 4%, dxd at 79.87

So, if you look at this 2 day movement, the dow gained and lost 2 percent and ended up at 7996.2, a .04% loss from 8000

DXD, in this 2 day movement, gained and lost 4% and ended up at 79.87, a .16% loss from 80

Basically there is decay with these leveraged etf's. However they can be very beneficial and not as risky as options. Plus, shorting individual stocks entials risk as you can get a nasty margin call if the market moves against you.

SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
Joined: Feb 11 2009
Posts: 2252
Re: Shorting the Dow? SAGER
bearmarkettrader wrote:

Plus, shorting individual stocks entials risk as you can get a nasty margin call if the market moves against you.

 

Thanks bear & jar -- I've got a book coming ("Day Trading for Dummies"...no really!) to help me grok all the jargon and get me up to speed before I start back into the market.

But it seems pretty likely that the markets have another nice tank in them starting in the next weeks/months and I want to take advantage.   And since I cannot be in front of the computer much during the day I can't do true day trading to work the intraday moves/swings the way some other folks (like Dogs et alia) can.  But I don't see any reason that I can't make money by playing the longer-term trend[s].

I think I could do quite well day trading as I'm disciplined and have a good mind for pulling useful info out of background noise.  But my life/work as currently constituted don't allow.  Maybe next lifetime.  

Thanks again!

Viva -- Sager 

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Re: Shorting the Dow?

Sager -

Stick with DIA as you get started.  Contrarian ETFs are fine once you get your brain wrapped around price relationships.

Cat and I almost exclusively trade DIA as far as "tracking" the Dow.  We also trade the OEX (S&P) and on rare occasion, the QQQQs (NAS).  You can buy and sell DIA, OEX and QQQQ or you can buy and sell options.  Just take what the market gives you, trade in the direction it is moving and be happy.  When it backs up on you, close the trade with a small loss - don't get all He Man Master of the Universe and try to manage the position back to break even or profitability - just get out, regroup and look for the next trade.

We don't short - I don't like the idea of causing the downward pressure.  Borderline unethical to me - not judging folks who short, we don't and won't do it.

NEVER TRADE ON MARGIN!!!!  "Margin Trading" is code word for "The opportunity to lose half your money now, and all of it later."

Here are a couple of books to add to your required reading list:

Getting Started In Options - Michael Thomsett http://www.amazon.com/Getting-Started-Options/dp/0470138068/ref=sr_1_1?ie=UTF8&s=books&qid=1238879406&sr=1-1 Kind of dry but you will get a great understanding of time value, intrinsic value and option time decay.

Trading For A Living - Alexander Elder http://www.amazon.com/Trading-Living-Psychology-Tactics-Management/dp/0471592242/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1238879264&sr=8-1  Superb trading psychology book.  Some outstanding discussion of market technicals - but don't bog down on these.

The Market Maker's Edge - Josh Lukeman http://www.amazon.com/Market-Makers-Edge-Josh-Lukeman/dp/0071412743/ref=sr_1_1?ie=UTF8&s=books&qid=1238879319&sr=1-1  Helps you to understand that the Market Maker despises your mere existence and lives take your money from you.

The Disciplined Trader - Mark Douglas http://www.amazon.com/Disciplined-Trader-Developing-Winning-Attitudes/dp/0132157578/ref=sr_1_1?ie=UTF8&s=books&qid=1238879468&sr=1-1 Another solid trading psychology book

Markets In Motion - http://www.amazon.com/Markets-Motion-Ned-Davis/dp/0471732818/ref=sr_1_1?ie=UTF8&s=books&qid=1238879555&sr=1-1  This is a great book for developing an understanding of historical expectation.  When technical indicators match historical expectation, there are likely going to be some trade entry opportunities.

 Send me an email off line if you have any questions and want to talk more.

 

plantguy90's picture
plantguy90
Status: Gold Member (Offline)
Joined: Jan 26 2009
Posts: 271
Re: Shorting the Dow?

Speaking of shorting,

Who is your broker?  I am very frustrated with Etrade as they basically dont allow me to short much.  The past 5-6 short ideas I have had, they tell me they cannot allow the trade as they cannot obtain the shares.  Both common stock and ETF's.  I wish to work with a broker-dealer that doesn't hamstring me like that.

 

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