User:Jukeboksi/Draftspace/Reverse trading

In reverse trading you are betting that the price of a futures contract, share, bond, debt, currency or commodity that you are shorting will fall, not rise, from your estimate which makes you profit.

The gambling functionality

Unlike in traditional investments where maximum loss is 100% of invested capital and the gains usually remain in 1 or 2 digit zone (and even as high as 3 digit (mostly achieved in IPOs) but not 4 i.e. thousands of percent in practice, even though there is no theoretical upper limit to the wins, in reverse financial instruments the maximum gain for the buyer approaches infinity, the maximum loss for the seller approaches infinity as well which, combined with other factors, such as overheating of the real estate and debt markets, can cause the system to meltdown like happened in Iceland, Ireland and USA in the early 2000s and contributed to the crisis in Greece in the early 2010s. The maximum gain for the seller of the put approaches 100% of the put price which may be -50% or -70% or +200% or +300% etc. i.e. over or under of 100% of the present value.

Reverse trading has caught the attention of U.S. Securities and Exchange Commission on several counts. In 1973 they documented a reverse trading variant where the bonds were bought from the same party to whom a short contract was sold at price substantially under the current price. Also excessive markups and writedowns were reported which are very ordinary in reverse trading.

Insurance facilities that reverse traders provide

It should be noted and stressed by economists that reverse traders also provide insurance facilities for businesses and thus banning them would have adverse effect. For example a miller can buy wheat futures and thus insure himself against the cost of wheat rising that happens in the case of less than average crop yield. The baker can buy wheat flour futures etc. An another example is fuel price risk management.

See also

• Futures trading i.e. selling and buying gets and puts
• Naked short selling (which was banned in Germany by chancellor Angela Merkel in 2010)
• Short (finance) (which has been around since the late 1800's) see Die Boerse (written in 1894-1896 by Max Weber) for more info
• Credit default swap
• Hedge fund

References

Category:Finance Category:Capitalism Category:Economic liberalism

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