Having Faith in Stock Market Predictions

When it comes to stock market gurus making predictions, I pay little attention. But what if we did believe a prediction? Laszlo Birinyi predicted that the S&P 500 would get to 2854 on 2013 Sept. 4. If we really believed this prediction, what is the best way of exploiting it?

You have to admire the precision of this prediction. Some would just predict 2800 sometime in late 2013. However, if we’re going to believe in one of these predictions, it might as well be a precise one.

So, we take it as a given that the S&P 500 will get from 1310.87 last week to 2854 on 2013 Sept. 4. One way to exploit this would be with SPX options. Last week options expiring in December 2013 struck at 2500 were selling on the Chicago Board of Options Exchange (CBOE) for 95 cents. By our magic date in 2013 they would be worth 2854-2500=354 plus a little more for the remaining time value.

Our plan would be to buy as many of these options as we can afford now, and sell all of them on the magic date. Let’s assume that with trading costs we pay $1.25 per option and make $350 in 2013. We would be increasing our money by a factor of 280. So, $100,000 would become $28 million.

Of course there are some potential problems here. Maybe buying so many of these options would drive up their price. Maybe we would have a hard time selling them all on the magic date. Maybe the S&P 500 would get to 2854 and then crash terribly before we could sell.

My question here is what is the safest way to make as much money as possible from the knowledge that the S&P 500 will hit 2854 on the magic date? I’ve offered one solution using options, but no doubt there are better ways.