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I think the bottom line here is that even if your timing is totally off on
the stock you are buying, it doesn't expire; very hard to compare apples
with all that other stuff.
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> From: A.J. Carisse <carisse@xxxxxxxxxxx>
> To: Omega List <omega-list@xxxxxxxxxx>
> Subject: Re: Stocks - the shame of it
> Date: Sunday, March 22, 1998 8:33 PM
>
> Tom Cathey wrote:
>
> > Bob Fulks wrote :
> >
> > > The spread is about the same in dollars for a typical order.
> >
> > However, if you look at the total value you are "buying", about
$14,000
> > controls you $275,000 of S&P 500 "stock" .
> > For the same comparison, you would need 18,333 shares of the $15
> > stock....thus, your 1/8 point spread would now cost you 18,333 shares
X
> > .125 = $2,291 !
>
> The problem with spreads, if one is trading at the market (which is only
> preferable in certain situations anyway), is that one becomes subject to
paying
> them. For instance, say our stock doesn't move, and you sell your 1000
shares
> at the bid, with a 1/8 spread, for a $125 loss. Say the same thing
happens
> with the futures contract, and you lose a similar amount. Now, the
dollar
> amount you have controlled doesn't have any bearing on this, of course.
Now,
> whatever happens to each trade in terms of their movement, these costs
will
> always be fixed on a per share or per contract basis.
>
> Many of the more liquid stocks now trade with spreads of only 1/16, or
this can
> be obtained by getting an inside fill. On these trades, the cost per
1000
> shares now is only $62.50. Personally, I rarely go over 1/16 here, but
to
> stick to the original example, let's assume that the typical spread that
our
> trader is subject to in his stock trades is 1/8, with an average price of
$50
> per share. Also, I'll assume that the typical spread for S+P futures
given is
> accurate. Now, in order for a meaningful comparison to be made here, we
need
> to look at the cost of the spread per a fixed amount of capital. Say our
> traders have 52k each to trade with - the futures trader would be trading
4
> contracts, and paying a spread of $400 each way ($800). Our stock
trader, on
> RegT (he's a day trader, and thus doesn't have to pay margin interest,
for the
> sake of simplicity), trades 2080 shares, and incurs a spread cost of $260
each
> way ($520) - considerably less than the futures trader with an equal
amount of
> capital.
>
> Now, whether or not our traders have a higher potential for returns on
their
> capital through these trades is another issue - the spread cost, as a
> percentage of their outlay, can easily be lower.
>
> Regards,
> A.J.
>
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