With stocks at multi-year lows and investor pain at multi-year highs, I’m pretty sure that going long the Intrade contract is not a bet I’d want to take…but that’s what makes a market. If I understand the value proposition correctly, the buyer who’s willing to pay ~ 80 cents to own this contract, now believes that there’s an 80% chance that he’ll see lower lows than 7,449.38 sometime this year. Conversely the seller who’s willing to sell this contract for ~ 80 cents now believes that there’s a 20% chance that he’ll see lower lows than 7,449.39 this year. See Disclosure and more beneath chart.
[Disclosure – Jonathan Smith doesn’t own this, or any, contract on Intrade (or any other prediction market) and isn’ making any recommendations, bets, conjectures, whatsoever. For the record, his dowsing stick isn’t any better than anybody else’s. Intrade.com is a prediction market, and much ado has been made by the media about prediction markets. In case you’re wondering what sort of payoff the buyer of the aforesaid contract gets for his ~ 80 cent investment if he wins. The answer is $1.00. On the other side of the transaction, the seller who sold the contract got ~ 80 cents for being willing to pay a buck if he loses. After he subtracts the ~ 80 cents he gets to keep from the buck he might have to pay out, he’ll be out ~ 20 cents, and so you could say he thinks there’s a 20% chance the Dow will go south of 7,449.38 in ’09.]
By the way, this chart used with permission by Intrade.com.