Trade idea: Buy Quarter Dog futures
Grace Concelman | Tuesday, August 30, 2011
A futures desk at a Wall Street bank sounds like some sort of covert fortune-telling operation. It sounds like the desk where traders can swing by in the morning to read the tea leaves and see what stocks are going to be hot that day. It almost doesn’t seem like it should be legal. Is divination how all of these Wall Street banks keep making money?
Actually, a future in the finance world is very different than Professor Trelawney’s class. It’s a standardized contract traded on an exchange in which two parties agree to trade something later for a price agreed upon today. The something can be pretty much anything — a currency, an interest rate or a commodity like gold or pork bellies (yes, people do still trade pork bellies in Chicago). The buyer of the future hopes the price will increase so that when the contract expires, he can buy at the agreed-upon price, go sell in the market for the higher price and pocket the difference. After all, the rule of finance is to “buy low, sell high.”
Legend has it that the first person to profit from futures was actually a philosopher named Thales. One year around 500 B.C., Thales predicted that the olive harvest would be particularly fruitful, and so he bought contracts from all of the olive press owners that gave him exclusive rights to the presses at harvest. The owners of the presses were happy to receive guaranteed income even if the harvest turned out poorly. Thales did some analysis based on weather patterns, and speculated that the harvest would be good, and so the future demand for use of the presses would be high. According to the legend, Thales was right and ended up making a lot of money. That, of course, was the last time a philosopher was in the news for making money.
I had a chance to rotate on a futures desk during my internship this summer and got a chance to see how these contracts are actually traded. Most of what I got to observe was interest rate futures, which are fundamental to the financial system, but way less exciting than futures for olive oil.
While I was on the desk one day, daydreaming in the mid-morning time when it’s too early to go get lunch but all you can think about is food so until noon you’re pretty much worthless, I started thinking a little more creatively about futures.
If there can be futures on pork bellies and the weather, what if there could be futures on other things?
I’d buy a future on the price of quarter dogs. As great as the tradition is, the price simply hasn’t kept pace with inflation. According to the Bureau of Labor Statistics, since 1993, when the Huddle started selling the hot dogs to hordes of hungry students needing midnight sustenance, inflation has risen by fifty-four percent. So, under the assumption that prices move with inflation, quarter dogs should actually cost $0.39. Despite strong student opposition, quarter dog prices will eventually have to rise, and I’d like to lock in the lower price now.
I’d sell a future on the continued existence of Stepan Center. Newer, less leaky buildings on campus have been steadily stealing away market share year by year until all that Stepan is really used for now is Domerfest and freshmen chemistry exams. It’s old, outdated and taking up space that could probably be put to more productive use. Plus, it really doesn’t fit in with the design philosophy of the rest of campus (although, by that argument, I’d also have to be a seller of futures on all of Mod Quad).
Finally, I’d buy a future on our football team. This is Notre Dame, after all — blind faith in our football team is something of an institution. So I’d buy a future on us going 12-0 this season and hedge it by also buying a future on my GPA this semester.
The rationale is that the success of the football team is inversely related to my grades — time spent on football is time not spent studying.
So, if the football team does really well, I make money on the football contract and lose money on the GPA one. If the football team disappoints, I lose money on the football contract, but make money on my GPA. Since it’s a perfectly hedged position I would theoretically come out even in the end, having made as much money on one contract as I lost on the other one. As a senior though, I’m thinking I’d prefer the first scenario.
Grace Concelman is a senior majoring in finance and philosophy. She can be reached at [email protected]
The views expressed in this column are those of the authors and not necessarily that of The Observer.