Technical analysis of stock trends - 8th edition

Chapter 17.2: Advancements in Investment Technology 323
for 11000 and you want to increase your commitment. Your portfolio is as
previously described, split 80/20 between Dow stocks and money markets.
It is time to go whole hog, you decide. You are acutely aware of the market
maxim that bulls make money and bears make money and hogs wind up
slaughtered, but there is also a market maxim that no market maxim is true
100% of the time, which is also true of this maxim.
Rather than liquidate your money market holdings, you buy one futures
contract, which puts you long another $100,000 of stocks. The rate of return
on the money markets in your portfolio is 0.5%. To get a $500,000 exposure
in blue chips, you buy the following number of contracts: $100,000/($10 ×
10000) = 1 contract.
Results: Your technical analysis of the direction of the market is correct,
and the Dow Future rises to 11000 at the September expiration, or by 10%.
Value of portfolio with passive management:
Stocks $400,000 × 1.10 $440,000
Money market + $100,000 × 1.005 $100,500
Total $540,500
Value of portfolio with futures position:
Long DJIA futures 1 × $10 × (11000 – 10000) $10,000
Total $550,500
Value of portfolio with reallocation of assets in cash market
Stocks $500,000 × 1.10 $550,000
Money market $0
Total $550,000
In buying Dow Index futures, you are able to “equitize” $100,000 of your
money market investment, effectively increasing your return from the money
market rate of 0.5% to 10%. If you had not bought futures, the total value
of your portfolio at the September expiration would have been $540,500
instead of $550,500. Not only do you have a $10,000 extra gain in your
portfolio, but you have taken advantage of the market’s continuing upward
climb without having to adjust your portfolio.