Futures Betting

I had a conversation with my friend who works at a hedge fund that invests in "futures".  I'll be honest here, I'm not that familiar with "futures" except for Stock Options.  I created the above spreadsheet to help myself understand them and to see if there was any real value in learning them.  I'll let people judge for themselves as to whether they wish to trade Stock Options.  Just remember buying and selling so frequently kills you on trade fees ($7 to $10 depending on broker) as well as taxes (higher income tax is paid on stock gains for stocks held less than 1 year i.e. 22% vs 38%).

Basically each party starts with $40k in cash.  I created 3 types of investors:

1. Person A - He is truly the Alpha Male and full of testosterone!  Every dollar in his possession burns a hole in his pocket until he trades stocks and stock options.
2. Person B - Let's call him Warren Buffet =)  Enough said.
3. Hedge Fund A - Is all about futures or stock options for this example.

Month 1 Transactions:

1. Person A - "I'm so buying Stock Z at $100 and I'm going to take Hedge Fund A on their Put Contract bet for $300 because I can buy different stock with that cash now.  No way is Stock Z going to fall below $90! Go Stock Z!!!!"
2. Person B - "Stock Z is too high.  I'll wait for it to drop a little bit."
3. Hedge Fund A - "Let's buy 200 shares of Stock Z.  Now let's make a bet to make this interesting.  I bet $300 that Stock Z will be less than $90 at Month 3.  If I win, you have to buy 100 shares of Stock Z from me at $90. Who wants to be paid $300 now to take this bet with me?"

Month 2 Transactions:

1. Person A - "Crap! Stock Z dropped to $85.  That's OK because it will come back.  Just in case I'll take Hedge Fund A on their Call Contract for $500 to make up for my loss.  But Stock Z is going to come back up, but maybe not above $110.  Go Stock Z (but not above $110)!"
2. Person B - "Stock Z is cheap now.  Time to buy 400 shares."
3. Hedge Fund A - "Now I bet $500 that Stock Z will be more than $110 at Month 5.  If I win, you have to sell 100 shares of Stock Z to me at $110. Who wants to be paid $500 now to take this bet with me?"

Month 3 Transactions:

1. Person A - "Crap! Stock Z dropped to $70 but I have to buy 100 more shares of Stock Z from Hedge Fund A for $90 because of that stupid bet I made.  Stupid Me!  Stupid.  Stupid.  Stupid!!!"
2. Person B - "zzzzzzz....."
3. Hedge Fund A - "Cha-ching!  Even though Stock Z fell to $70 I was able to sell at 100 shares of Stock Z for $90 to Person A because of our bet.  Now I can buy different stocks since all stocks are down today.  Muahahaha."

Month 4 Transactions:

1. Person A - "Guess who's back.  Back again.  Stock Z is back.  Tell a friend.  And now I have 400 shares total instead of only 300 shares thanks to that Put Contract from Hedge Fund A."
2. Person B - "Do Re Mi Fa So La Ti Do....."
3. Hedge Fund A - "C'mon Stock Z!  Get above $110!"

Month 5 Transactions:

1. Person A - "Crap! Crap! Crap!  I just lost 100 shares to Hedge Fund A for $110 only when the price is $120.  That's a loss of $1000 in profit!  Stupid Me!  Stupid!  Stupid!  Stupid!  Argh... I think I need to see a doctor from all this stress."
2. Person B - "Is it forever yet?"
3. Hedge Fund A - "Cha-ching again!  We can buy 100 more shares of Stock Z from Person A (what a sucker... hehehe) at $110 today and just sell it for $120 for immediate profit of $1000.  Or should we wait a little bit more to see if Stock Z keeps going up?  Decisions.  Decisions."