Perspicuous Risk

Or, how to recognize a futures trading pitfall.

Or, how to convince Clients you are a Wingnut.

Following several years of some small success in trading commodity futures as a sideline, I decided on a career change entering the financial services venue. I wanted to trade full time. I resigned from a well compensated position of responsibility; seeking to grab the brass ring while yet a young man. I desired 1) the big bucks and 2) to survive by my wits.

It was my great fortune to have attracted a first mentor. A well-known trader. He was a man of few words. During market hours the conversation was pretty much limited to grunts; his eyes were always glued to the quote board.

Anyone who happened to walk into his sight path was rewarded with a fearsome expression. He was feared in the office: the result of earning huge commissions along with a very successful record of speculation. At times he endured great market stress, yet he wore a poker face. As a result of this placid expression, intense body language and a desktop crowded with various stomach soothing remedies and antacids, a few folks viewed him as an eccentric irascible brute. He never minced words.

I found this amusing because outside the office, when the markets were closed, he was a class act, a soft-spoken gentleman. We became close friends.

Our trading styles were opposite. I preferred a foundation of facts followed with an appropriate technical setup. Mostly, I searched for analog years.  While he was interested in facts, he mainly searched for specific chart formations. He loved to trade pork bellies, and was good at it.  He’d reaped great trading rewards and survived occasional serious adversity.

Early in December, I think it was 1969; he called alerting me to a situation in shell egg futures. Shell eggs are no longer traded. Thankfully.

Shell egg futures were traded on the CME. The market opened at 9:20 & closed at 1 pm. It was a very low volume trade. The contract was for 750 cases of 30 dozen, non-oiled shell eggs. That is 22,500 dozen per futures contract.

My mentor, after engaging in considerable homework and considerable networking with a variety of egg wholesalers presented the bottom line. The sale of January Egg futures by mid-December was generally a very successful trade with the January making new contract lows prior to the expiration of the contract. My interest was whetted.

I confirmed his research. My background was agriculture. I contacted several of my egg merchant contacts as well as several large producers.

We developed a plan. I contacted clients, everyone was excited. According to plan, we entered sell orders for January eggs at a selection of higher price levels. Several days expired. None of our orders were executed. Are we going to miss this sweet trade?

Within a couple of days, all of our orders were executed. The market closed lower. It closed lower the following day. The day after, the price of January eggs broke down through support. The next day, following a timid price rally, we doubled our short positions. I felt particularly good. I related the potential good news to the spouse. We had no debts. We enjoyed a nice savings account.  I felt flush.

I believe it was the following Monday morning. January eggs opened limit bid. No trade. Later I learned a renowned egg trader walked into the egg pit prior to the open and at the bell, bid limit bid for a thousand contracts.  On a good volume day, egg futures seldom reached a thousand contracts.

Unexpected market action can be disturbing. Particularly to a greenhorn. I, very casually, called all of my egg contacts. I did not relate I was short, I sought their objective opinion. “We are swamped with eggs”, or “I can’t get a decent bid for several truck loads of eggs,” or “we are out of the market, we cannot hold any more eggs.”

I relaxed.

The next day, and for five or six days hence, the first opening trade for January eggs was limit bid. Clients were now disgruntled as they were writing margin checks. The clearing member sent a single engine plane out daily to various geographic points to collect checks as the US Mail was too slow. There was zero trade in January eggs, just a pool of unfilled buy orders.

I received a hostile call from the margin clerk. Why are you still in those eggs? It’s a terrible position! I related I was ‘out of money’ and would very much like to be out of the position.

The morning my buy orders and the orders of my clients were executed was a bittersweet moment. Our losses were large. Within 5 minutes of being filled at a price of $61.20, the market collapsed to limit sellers.

January eggs expired at new contract lows. I, however, was on the sidelines exploring the idea of trading some grain spreads as the margin requirement was almost nil. I was nearly broke.

An experienced trader will recognize this particular speculation raised a few initial cautionary flags.

I soon learned to adopt the placid emotion of my mentor. I no longer feel flush or discouraged about a market. If I sense something amiss, I get out.

Long ago, I learned to take quick losses.

Chicken is never on my menu.

Thursday morning the spouse suggested I clean the garage. My immediate reaction inspired her to retort that my mood bordered on sour. Sour is not good at my age; I like to believe I am always of positive mood tied to an energetic light-hearted spirit.

Being of Scandinavian heritage I am too insecure to engage in an objective self analysis. I sought a second opinion. My 10 year old grandson.

He has become quite a financial expert. Albeit by accident When about five years old, he came over to program our DVD player and attempted to sucker me into a game of checkers; Canasta being my game, I cleverly pulled off a bait and switch and planted some seeds re: arbitrage. Mostly grain spreads & metals. I TiVo Squawk on the Street enabling him to watch Erin Burnett during his lunch hour He thinks Erin is hot; hot to the extent his mother has placed the CNBC channel under parental control.

As he wolfed down a tuna salad sandwich I broached my concern. “Am I sour?”

“No gramps,” his eyes locked onto the HDTV.

“I feel a little forlorn.”

“No wonder. You missed the greatest corn sale of the century last July. You own ½ line of cattle….took a little juice there….and bought December hogs. Now there is Swine Flu. Your timing is off.”

“I lean towards fundamental analysis.”

“Gramps. I know. You need to update your life skills. You have all kinds of technical tools on your trading platform. Use them! The Andrews Pitchfork. MACD. RSI. Get organized. What about me?”

“Did I put too much celery in the tuna?”

“Nah. The tuna is great. I am talking about my future! Property values have collapsed and most likely headed lower. Commercial real estate is in the tank. Credit cards are in trouble. The politicians are in bed with the banks. Quite a few crooks in the banking system. Helicopter Ben is dumping money all over the place. Nancy Pelosi wears the same facial expression just like me before I learned how to tie my shoes. Do you have any idea whatsoever the level of local, state and federal taxes I am going to have to pay!?”

“Your generation faces some big challenges.”

“Come on gramps! You like straight talk. I smell opportunities except I have to be 21 to sign up for TARP. You older guys have lost control. Weak. I signed up with Rosetta Stone to take Mandarin. Talk about bleak! Daylight is burning. I told mom I want to get a passport.”

“A passport? You plan on leaving?”

“Yes. Face it gramps. The Asians own us. You taught me to always go to the source. To the money. I’ve spotted a location inMongolia.”

 “What about me? What about your grandmother? What about your folks? What about money?”

“I’ve been talking to Grams. She uses Gann. She convinced me to flip out of gold on this last rally; I picked up someToledosoybean receipts at 5 under, hedged them in the August. Going to roll into the November if this rain continues. I can handle my own way.”

“The climate inMongoliacan be rough. It’s remote. A Communist country!”

“A 900 square foot Yurt is my plan. Cheap. Cozy. Get real Gramps!Russiais more capitalistic than we are; so isChina. I have entrepreneurial genes. I have some French and Irish in me, not a full blooded Scandinavian. I’m a self-starter. I want you and Grams to come along.”

“Have you really thought this through? Smacks of rash behavior.”

“Face it Gramps. You need to buck up! Think about your future. If your trading doesn’t improve, it could next be a group home; disposable scuff slippers; no more cigars; possibly won’t allow the occasional shot of Templeton Rye. I’ll get a satellite phone. A couple BMW off road bikes, what else do we need?”

“I wonder if folks use deodorant over there? What about my 90% beef trim for my burgers? Tomatoes and Onions? Showers? Besides, I have been mulling over two alternatives: return to the car wash, or install side boards on the F-105 so I could pick up aluminum cans.”

“Gramps! When our ancestors arrived in Morris, there was no indoor plumbing. Their goal was to establish a profit center. They sought individual freedom. Freedom from restrictive rules. You’ll develop a taste for mutton. Onions, no problem. In the spring we can nail the occasional Hare. I understand Camel is a little tangy, but so what? We come from pioneer heritage!”

“I’ll have to talk it over with your grandmother. I have to wait for the weekend for that conference as she is always busy redrawing her Gann lines. I also need to check with your uncles and I would like to pass it by my long ago advisor, Jimmy the telephone guy. I’ll go down to Navy Pier on Saturday. I haven’t seen him for several years. I seldom made a move in the old days without first talking to Jimmy. Since the advent of electronic trading I understand he is involved in a new venture. I’ll let you know Monday.”

“Isn’t he the guy who was always drunk?”

“He was forced to turn to Martinis when the CBOT banned smoking on the 4^thfloor. He handled massive orders for me every day, never made a mistake. Better drunk than most fellows sober. A small detail. He had great connections.”