Brain Teaser Trading Test (continued)
It is Thursday evening. You have 10 short positions open and 5 long positions have closed for a profit for the day of £200. You are happy with yourself.
The FTSE100 ended down for the week. At 6pm Thursday evening you notice that Wall St (the DJIA) is shooting up and your remaining open positions are all short (you want the market to go down not up in order to make money on your positions).
At 9:30pm on Thursday after Wall St has closed you check the closing price of the DJIA index. It has risen 245 points for the day. This is a considerable rise, the largest single daily movement for more than 3 years on the index.
You wake up Friday morning and wait for the London Stock Exchange to open at 8:00am. It is 8:01am and you are logged into your account. Instantaneously, your open positions are now down a total of £300. You panic. With 10 open positions open, the largest move on the DJIA in 3 years in the oposite direction to the positions you have open. You panic.....
You decide to hedge against your open positions by going long on the FTSE100 index. Any upward move in the FTSE on this new position will offset losses on your open short positions. You open a positions of £5/point long on the FTSE100 at 6246. The market falls. You open another £5/point long on the FTSE100 at 6242. The market falls, in the opposite direction to the direction of the huge movement upwards on the DJIA the evening before. You open another £5/point long at the FTSE100 at 6239. The market falls again, you open a final position on the FTSE100 at 6237 of £5/point. You are now long £20/point at an average of 6241 on the FTSE100. At that level, just a small move of 15 points over 6241 on the FTSE100 will offset the £300 of losses on the 10 open short stock positions.
You have stops in on the FTSE positions at 6122 average. You head to work, monitoring yahoo! finance on your mobile. The FTSE rises above 6241 to 6243 and you are up £40 on your FTSE positions. Things are looking good.
You get off the tube at 9:00am and walk to work. Checking yahoo! finance again and the FTSE has fallen down to 6200 and your FTSE100 positions are now at a loss of £800. The 10 open stock positions will have slightly reduced from their £300 loss with the lowering of the FTSE.
You are now down a total of £1000 on your account of £4000. What do you do? The DJIA had the biggest rise in 3 years the day before. The FTSE100 is now down below where it closed yesterday.
OPTION 1