Part 2: Combinations Involving Different Types Of Market


An Excerpt from Proudhon's Stock Exchange Speculator’s Manual

Submitted by vasily on June 15, 2024

We have mentioned three types of market:



Forward and premium.

The purchase and sale, following one or other of these three modes, can be combined two by two in all possible ways, at the choice of the players, according to their calculations and interests.

Speculation is either on the rise or on the fall. In the first case, you buy to sell; in the second, you sell before buying. Thus, prices are rising; I become a buyer of 3 0/0 at 70 fr., and wait, to sell, until the annuity has risen to 70 50 or above. - Conversely, the decrease goes crescendo; I sell at 69, and wait to buy until the price is below this rate, at 68 50 for example.

Thus, it results that bearish transactions are necessarily forward-looking; that it is in the interest of the bearish to discredit values; that the government consequently has the right and the duty to stop, by all means that the freedom of transactions authorizes, this debacle: for it is its own credit that is sought to be ruined, at least concerning annuities, moral credit in all cases, material credit if it needs to borrow.

§ 1 upward transactions.
You can buy spot or forward.

a) If you buy spot, you can resell: 1o spot; 2o firm; 3o at a premium, as soon as the price rises.

Futures, you can:

b) Buy firm, sell: 1o firm, 2o at premium:

c) Buy at premium and sell: 1o firm, 2o at premium.

Let's take some examples.

a) I buy a cash annuity of 1,500 fr. 3 0/0 at 70, that is, a capital sum of 35,000 fr.

1. I sell them the next day for cash at 70 20, that is 35,100 fr.: difference to my profit, 100 fr.

2. I sell them firm at the end of the month at 70 60, the carryover rate being 60 c.; profit, 300 fr.

3. I sell them at a premium at the end of next term at 71 including 1, the premium annuity always being the most expensive, that is 35,500 fr.; excess to my profit, 500 fr., whether the securities are raised or not. If they are not raised, it's that there's a decline, and I remain a purchaser of public funds while awaiting the rise.

b) I bought firm, at the end of the current term, 25 shares in Comptoir d'escompte at 670 fr. that is, in capital, 16,750 fr.

1. I sell them firm, at the end of next term, at 680, that is 250 fr. to my profit. In this case, I'll have to take delivery on my deadline. If I don't have 16,750 fr., I can't resell for a longer period than I bought.

2. I sell them at a premium of 5, at the end of the current term, profit to my profit, 125 fr., if the shares are raised. If they aren't, it's that there's a decline, and in the latter case, as I need to sell in order to raise myself, the purchase being firm, I've made a false speculation. Let’s suppose I'm obliged to trade at 663, I will receive 16,575 fr. against 16,760 fr. that I will have to pay: the difference to my detriment is 175 fr. from which I must deduct the premium of 125 fr. that remains, reducing my deficit to 50 fr. In this market, losses are unlimited.

c) I buy at a premium of 10, at the end of the current term, 50 Nord at 890; that is, in capital, 44,500 fr.

1. I resell them firm at 894; difference to my profit, 200 fr. If the shares have fallen to 885, as I have paid a 500-fr. of premium, it is in my interest to raise them; because, by reselling at this price, which is 44.250, I lose 250 fr., whereas not taking delivery, I lose the 500-fr. premium. In this market, the loss cannot exceed 500 fr.

2. I resell them at a premium including 5, at 896; that is 44,800 fr.; difference to my advantage, 300 fr. if delivery takes place. If it doesn't occur, it's that there's a drop, and the 250 fr. premium stays with me. But I paid a 500-fr. premium myself; if I have to forfeit it too, my deficit will only be 250 fr.

This last example is a premium-versus-premium operation, to which we will return to.

§ 2. downward transactions.
They are necessarily futures.

a) I sell short bonds and wait for the downturn.

Thus, I sell 50 bonds of the city of Paris at 1,120 fr. which is in capital 56,000 fr. Between the time of the market and the expiry, they fall to 1,110; I purchase at this price (spot or forward); difference to my profit, 500 fr. - If the price remains at 1,120, I gain nothing, but I only lose the brokerage fees. If the price goes up instead of down, my loss can become considerable.

b) I sell at short premium.

Example. - I sell at a premium of 1 50, at the end of next term, 4,000 fr. of annuity 4 0/0 at 80; that is, in capital, 80,000 fr., premium, 1,500 fr. If the fall occurs, and the annuity is at 77 at expiry, the securities will not be raised: I won't need to buy; I'll earn the 1,500 fr. - If there is a rise, and my buyer takes delivery, I'll lose the difference between the sale price and that at which I will be obliged to buy, that is 1,000 fr., in the event that the 4 is at 81. The loss, in this circumstance, is not limited to the short seller; it is limited to 1,500 fr. for the buyer.

c) I buy at a premium and sell firm at the very instant.

Example. - The 3 0/0 at premium of which 1 is at 81 at the current end, and the annuity firm 80 60. I purchase 1,500 fr. of annuity at the first rate, that is, in capital 40,500 fr., premium 500 fr. I immediately resell them on a firm basis at the second rate 80 60, that is, in capital 40,300 fr.; difference to my detriment, 200 fr. If the drop occurs, in accordance to my predictions, and the 3 falls to 79, I cancel my first market by forfeiting the premium, and I buy firm at 79; that is, in capital, 39,500 fr. I sold 40,300 fr; gross profit, 800; from which we must deduct

the 500-fr. premium that I forfeited; net profit, 300 fr. - the rise holds until the time of delivery: I actualize my purchase at a premium, which costs me 40,500 fr. and my loss is limited to 200 fr.

§ 3. complex operations.
The transactions which we have just described the mechanism is comprised of the different types of market analysed in the first part of this chapter; those which follow are combinations of the operations themselves: they present an infinite number of complications. We use them when the fluctuations of the quotation are indecisive, sometimes increasing, sometimes decreasing. We will mention the most commonly used.

1. Upward or downward transactions.
If the variations are not considerable:

I purchase a firm of 25 shares of the Bank at 2,700, that is 67,500 fr., and I sell 50 at a premium, including 10 at 2,705, that is 135,250 fr. The securities will be raised or not.

1. If they are raised:

I'll have to repurchase 25 shares at the price of the day. The rise is permanent: I've made a false speculation. But if my predictions come true, there have to be alternatives of rise and decline; I purchase on the decline at 2.702, which is for 25 shares, 67.550 francs.

Thus, I have on the one hand:

25 shares at 2700, that is 67,500 fr.

25 - 2,702, - 67,550

-------- -------- --------

Total 135,050

I resold the whole 135,250

difference to my profit 200 fr.

The buyer with a premium of 2.705 will take delivery if only the shares are at 2.696, because he loses 9 fr. per share, that is 350 fr., while if he forfeits his premium of 10 fr. per share, he loses 500 fr.

We have assumed that the second purchase is more expensive than the first: the opposite could occur; the profit would then be increased accordingly.

2. If the securities are not exercised:

I may find myself a seller not only of 25 shares, but of 50, because I had to put myself in a position in anticipation of delivery. I sold at my own risk and perils, at 2,695 let's suppose, that is to say in capital 134,750 fr.

I have to pay 135,050


Deficit 300

But the premium of 500 fr. remains with me, and I find that in the end I have earned 200 fr.

The favourable chances of a market of this kind are therefore subject to the two essential conditions we have talked about, that is: perpetual oscillations in the quotation and minor but considerable variations. The consummate players are the only ones who can foresee these occurrences.

If the variations are considerable:

I buy 10 x at a premium.

I immediately resell 5 x firm; I'm at a loss, since the firm sale is cheaper than the premium one.

I wait to sell the remaining 5 x until the rise has returned to the point where it covers my deficit and gives me a gain. In that case, the transaction ends there.

If the fall is below the rate at which I sold the 5 x, I cancel, by forfeiting the premium, my first purchase of 10 x, which costs me more than I sold, and I repurchase at a lower rate the 5 x that I have to deliver.

2. Premium-versus-premium transactions.
They have the advantage of limiting the losses; by contrast, they yield little profit. They are based on the fact that the higher the premium, the lower the price. Thus a premium of 1 franc is cheaper than a premium of 50 centimes. - These kinds of deals require a great deal of experience of the Stock Exchange and are not good for beginners.

Example. - I buy 1,500 fr. of 3 0/0 annuity, including 1, at 80. I resell them immediately at 80 70, including 50 c.

1. If at expiry the prices increase, the premiums are lifted, and I earn the difference of 70 c. per coupon, which is 350 fr.

2. If they are in decline, the buyer forfeits his premium of which 50 c, that is 250 fr., I forfeit mine of which 1, that is 500 fr., my loss is only 250 fr.

3. If they are at par or close to it, at 80.05, for example, my buyer does not lift his premium, which remains with me, which is 250 fr., and I resell at 5 centimes of profit, which is 25 fr. for a total of 275 fr., except the deduction of brokerage.

Another example. - Conversely, I purchase at 80 70 including 50, I resell at 80 including 1.

1. If at expiry the price is on the rise, my loss is limited to 70 c.

2. If the price falls and the premiums are waived, I receive 1 fr. and give only 50 c.; my profit is 50 c.

3. If the fall is not steep enough to prevent my buyer from taking delivery, that is to say only 60 c, for example (79 40), I forfeit my first market and repurchase at 79 40; as I am a seller at 80, my gross profit is 60 c, from which the 50 c. premium I forfeited must be deducted; net profit, 10 c.

Another example. - I sell 10 x at a premium of which 50 c. at the end of the current term; I repurchase 10 x at a premium of which 1 at the end of the next term.

If at the end of the month the 10 x are not raised, I earn the 50 c.; which halves my premium including 1.

If they are lifted, I purchase the 10 x I have to deliver at the end of the current term, and I remain the buyer of the first 10 x which allows me to profit from the chances of a rise. - That's what we call carrying over on premium.

You can still purchase a quantity of values at a premium of 1, and resell twice that quantity at a premium of 50. If the securities are not raised on either side, the transaction is null.

Conversely, you can purchase a quantity of securities at a premium of

which 50, quantity of shares at a premium of which 50, we resell twice as many at a premium of which 1.

3. Arbitrage on public securities.
It's an operation which consists of exchanging one value for another - of 4 ½ for 3, for example - in order to profit from the difference. It is based on the fact that the various kinds of funds are not always at the same rate; thus 3 0/0, on which is the preference of speculation, is more expensive than 4 and 4 ½. It is at 67 when 4 ½ is at 90; for the two annuities to be at the same rate, it would have to be worth 100 ½ 50 when 3 costs 67.

Example of an arbitrage operation. - I possess a 1,500-fr. 3 0/0 annuity. The 3 rises to 85, while the 4 ½ remains at 105. I sell at 85 and actualize a capital of 42,500 fr. With this sum I repurchase in 4 ½, at 105, 1,818 fr. of annuity at the price of 42,420 fr. If I limit my operation there, my annuity has increased by 318 fr. and I have 80 fr. remaining on my capital.

But if I wanted to make a speculation, I was led to change my investment in the hope of seeing the 4 ½ increase and the 3 decrease; I am therefore halfway through the toil. Let’s suppose that my prediction is actualised: the 4 ½ is at 107 and the 3 at 80, I sell my 1,818 fr. 4 ½ at 107.

Thus 43.228 fr.

I repurchase at 80 1,500 fr. of 3 0/0, hereto 40.000


Difference to my profit 3.228

Plus the 80 fr. of the first operation 80

Total profit 3.308

Thus I find myself, as before, the possessor of a 1,500-fr. 3 0/0 annuity, and I have earned 3,308 fr.

4. Means to improve false speculations.
We have already indicated how by means of carry-overs

you can prolong an operation that has become bad at the moment of liquidation. There are still other resources, which we need to talk about further.

1. I have short-sold annuities at 80 50. The rise occurs; I am forced to purchase at 81 to make my delivery. I lose 50 c. per coupon if my transaction ends there. But I believe in the return of the decrease. I sell at the end of next term at 81 30, the carry cost being presumed to be 30 c.; I pay the difference of 50 c. in liquidation, and I remain a forward seller while waiting for the decrease.

2. I purchased 1,500 fr. of 3 0/0 at 80; the annuity falls to 78; I purchase the same quantity at this price. I find myself the purchaser of 3,000 fr. of annuity at the average price of 79; as long as the funds rise above the latter figure, I'll have a profit. That's what we call averaging down.

3. Conversely, I short-sold 1,500 fr. of annuities at 80. Then the price increase occurs to 81; I resell the same quantity of shares at this price. I find myself a seller of 3,000 fr. of annuities at the average price of 80 50. Provided that the decrease comes back below this last figure, I'll be able to buy at a profit.

4. Bullishly operating, I purchased 20 x. This is when the decrease occurs; I'm at a loss. But I resell 40 x. Buyer of 20 x, seller of 40 x, I remain seller of 20 x. I wait for the purchase until the decrease allows me to at least cover the loss from my first market. - This operation, which began on the downside, ends on the upside.

5. Conversely, I sold short 1,500 fr. of annuity at 80. Then the increase occurs, at 81. I purchase, not 1,500 fr. but 3,000; I liquidate at a loss from my first market, but I remain the buyer of 1,500 fr. of annuity, and I wait, to sell, until the increase can compensate me for my deficit. - This speculation, which began on the downside, ended on the upside.

We have reviewed the most remarkable combinations of speculation. We do not claim to have enumerated them all, for they take on, like the Proteus of the Fable, the most diverse forms. At every moment, we invent new ones. What characterises them in general is that, although they may be used, by exception, for serious operations, they usually have no other motive than gambling, and fall outside the scope of productive speculation, and under the prohibitions of the law. But the law, the gambler defies it: what he wouldn't give to be able to defy fortune as well!...