I've just got into CFD's and can see the light in terms of making money.
Consider the recent Telstra collapse ...
If I take a SHORT CFD I can make bucket loads with a small capital outlay and can calculate an exact $ risk on the trade!
Assume I buy in at $5 in early August and sell off at $4.20 .... in early September. Both open and close prices aren't at the height or bottom of the carnage either!
Now ... since I'm going SHORT that represents a profit of $0.80 per share.
What is the cost and how many shares can I buy?
Virtually all CFD providers require a premium of 5% on Telstra.
For a premium of $2000 the CFD provider will purchase $40 000 worth of Telstra for me, abd charging (at most) 8% P.A on the borrowed $38000.
So the max that I have to put down is $2000 on the table ... but here's the plan ...
So ... assume a GUARANTEED stop loss at $5.20.
Then a purchase of ($40 000/($5 per share) ) = 8000 shares can be made from the small capital outlay of $2000.
For a one month position only, the total interest payed is ... 31/365*0.08*$38 000 = $274.10. That is, 8% p.a for one month only, and payable on the borrowed $38000.
So ... Assume the WORST CASE SCENARIO (best to be grounded and work out the worst of it first, before smiling at the best case profits) ...
If Telstra mysteriously for some reason bolts up to the stop loss of $5.20 (when it's being rerated and smashed so publicly it hasn't got a hope of getting to this) then ...
If your market position is only going to be for a month then you owe the max interest for a month + the 20c loss on the 40K worth of shares.
This value works out to be 0.2*8000 = 1600
Adding the interest = 1600 + $274.10
TOTAL MAX LOSS = $1874.10
TOTAL POTENTIAL GAIN ... THE GREATER PROBABILITY!
Since we are selling at $4.20 and bought in at $5 then we are owed $0.80 per share by the guy on the other side of the fence taking a bullish position on TLS
He owes me:
0.80*8000 = $6400
I owe the CFD provider the $274.10 interest.
I WALK AWAY WITH $6159.90!!!!
So ... going short in my opinion is much easier to profit on provided that a company is experiencing hardship ... Rats will rush out of the ship and you will be smiling all the way to the bank.
I propose that for those who are interested, that we get our own little group going looking for companies which are going to get smashed! It's too profitable an opportunity to let go and it's going to be more relevant in the up coming 2006 which is meant to be a correction year! Anyone interested, reply to my message! If you aren't interested then I would also like to hear what you think of my argument.
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