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Lesson 31: An e-mail from Emma

Mrs. B has two e-mail addresses established for the exclusive use of her robots. One address is set up to receive reports of the profitable trades made by each individual robot. She calls this the good news account. Robots in trouble use the other e-mail address. As you may well imagine, she calls this the need help file. Mrs. B has designated the emails sent to her 'good news account' to be colored green. The e-mails she receives from robots suffering losses are always red. Whenever she receives an email, Mrs. B can immediately determine if a robot is in trouble or in profits. In allocating her time, Mrs. B always directs her immediate attention to those robots that need help.

In a way, Mrs. B is like the real world mother with ten children who, when asked by a friendly neighbor, "Which of your children do you love the most?" responded, "I love the one the most who needs me the most at any given time." Mrs. B would have liked this real world woman. Mrs. B also tries to help the robots that need her the most, at any given time. She feels that robots that are making profits don't need much help at all; they are doing pretty well on their own. She follows their progress by the green emails they send her daily but beyond that Mrs. B devotes most of her attention to "those robots who need her the most". With 60 robots running wild through the commodity markets of the nation, half of them long and half of them short, there are always several in great need of great help. Thus it was that Mrs. B was not surprised when on Thursday, February 8th, 2001, Mrs. B received the following need help file email from robot Emma,

    "Mama B, I am in the July contract and in trouble. I am being hurt badly by the February break. What shall I do"- signed Emma.

Mrs. B knew that Emma traded only soybean oil. She knew that she was always long and that she had taken her current position "at the market" on the close of trading just one week earlier. If Emma was feeling pressure from losses in the July soybean oil contract this meant only one thing, July soybean oil futures were lower at the close of trading on February 8th, than they had been at the close of trading on February 1st. Emma's red e-mail signified that she needed help and Mrs. B had to act quickly. Before she responded, however, Mrs. B would have to do a little research into exactly what the "February Break" was and how it affected soybean oil prices.

There is a historic tendency for grain prices to move lower into the month of February. No one knows exactly why this is so. It used to be said that it was due to tax selling, or when traders sold out for long term capital gains when such existed in the futures markets. Some say the February Break results when foreign buyers hesitate purchasing grains in January and so prices decline into the month of February. It has also been noted, however, that once February is over there is a tendency for grain prices to rise into mid-summer. This pattern is often reflected in the prices for wheat, corn, oats, soybeans, soybean meal and soybean oil. The possibility of a February Break in prices for these commodities is well known by most grain and oilseed traders. It didn't take Mrs. B long to learn about this February Break tendency and it didn't take her long to see if the tendency for grains in general also held true for soybean oil futures. Before responding to Emma's e-mail, Mrs. B located a set of graphs for the price of July soybean oil futures for the past 41 years. Mrs. B generally limits her research to approximately a 40-year period believing that going back to around 1960 sufficiently reflects modern trends in commodity prices and that going back to the 1930's, 40's, even the 1950's is not necessary in most cases. When Mrs. B looked into the February Break in grain and oilseed prices for the past 41 years, this is what she found,

There is a tendency but not a certainty that grain prices and oilseed prices will move lower into the month of February.

There is also a tendency but not a certainty for soybean oil prices to move higher once the month of February is over.

In her research Mrs. B assumed hypothetically that she had purchased July soybean oil futures "at the market" on the close on February 1st for each year out of the past 41 years. In 32 of those years she discovered that there would have been an opportunity for profit by such a purchase and that this opportunity for profit could be calculated at 78%. Simply dividing 32 by 41 arrived at this calculation. Mrs. B likes profit opportunities where the percentages are 75% or higher in her favor. Mrs. B not only likes profit opportunities, she also likes profits. Emma's e-mail has resulted in a situation that might allow Mrs. B to give Emma some sound advice and also enable her to pick up a little profit for herself on the side. Mrs. B likes this; in fact it is one of the reasons why she uses robots in the first place.

When Mrs. B takes a futures or options position, she likes to keep her risk of loss relatively small. She has to adopt this policy, she has only $5,000 with which to trade and she does not wish to assume any risk beyond $5,000. In the case of soybean oil, Mrs. B thinks a risk of about 50 points is reasonable. Fifty points is a risk of $300, not including any commissions she will have to pay or any slippage that might occur if her orders don't fill at the exact location where her stop/loss or profit/exit orders are placed. Assuming she owns 1 contract the risk will probably be less than $500 for the trade. Mrs. B is willing to consider such a trade and such a risk when there is an opportunity (not a certainty but an opportunity) for profit with a 75% or more probability working in her favor.

Before answering Emma's e-mail, then, Mrs. B thinks that this is what she might do in her own $5,000 account. (And her plans are always subject to change at any time market conditions change). She might tell Emma to ride through the February Break in soybean oil prices. Telling Emma to hold on should be good long-term advice for that robot. Mrs. B might then join up with Emma by going long July soybean oil in her own account once prices return to their February 1st closing level. On paper, it would look like this,

July soybean oil closed on February 1st at

15.82

July soybean oil closed on February 8th at

15.18

This decline of 64 points might be the notorious February Break.

If it is, Mrs. B will make her purchase of July Soybean Oil when prices once again close at 15.82 or higher. If this happens, it could mean that the notorious decline in prices for the month of February is over (the other possibility always being that the decline in prices for the month of February is not over) and that the 78% opportunity for profit when buying soybean oil on February 1st is now starting to present itself. Mrs. B used her research into the February Break that occurs in grain and oilseed prices to take two immediate actions. She first responded to Emma with the following e-mail,

    "Hold on Emma. The February break should not last much longer. There is a 78% probability that by buying July soybean oil on February 1st you will have the opportunity to sell your position for a profit before the month of July arrives. Hold on, Emma -signed, Mama B.

After Mrs. B had clicked to send this email to Emma, she took the following action on her own behalf. She called her own commodity broker and gave her broker this order,

"Buy 1 contract of July Soybean Oil futures for me the next time July soybean oil futures close at 15.82 or higher. When this happens, enter a stop/loss order for me 50 points below my purchase price. Then give me a phone call letting me know at what price my purchase order filled. Once I know my purchase price and the price at which my stop/loss rests, I will let you know what my profit/exit order will be. Don't forget to phone me once you know that my buy order has filled."

Mrs. B took a deep breath. She was not in the market yet but it was a very good possibility that she would own a position when the February Break was over. She felt good about her e-mail to Emma. Emma was in no real danger; she was only down $384.00. Even if Emma took a hit, she could always recover her losses by borrowing some money from Jordan. After all, isn't that what robots are for, to help each other out in times of need. 384.00 pounds of pressure on Emma was nothing. Mrs. B had designed her robots to stand up to 10,000 pounds of pressure each before imploding. Emma had a long way to go before she could ever suffer a $10,000.00 loss on one contract of July soybean oil purchased "at the market" on the close on February 1st, 2001.

Mrs. B took another deep breath. Emma was okay, she felt pretty sure of that. Jordan, she knew, was plenty happy since he was showing a profit in his soybean oil trade. Mrs. B knew that she, most likely, was about to take her first commodity futures position in the year 2001. She would initially risk 50 points and would enter a profit/exit order once she knew at what level she had made her purchase. Mrs. B took another deep breath and began to relax. She had not felt this good in a long time.

Unfortunately, Mrs. B was not able to rest for long before she heard the sound of a ping on her computer that told her that she had received another e-mail message. Glancing up she saw that it was from Hailey. Having helped Emma, Mrs. B's eyes now scanned down the computer screen to see what Hailey had to say. The message, being in red, did not surprise her,

    "Mama B, Mama B, I am feeling the pressure. I am long the December contract and I am in big trouble. What shall I do" - signed Hailey.

Mrs. B smiled. Which of her robots did she love the most? The one who needed her most at any given time and it was now time to help out Hailey. Hailey always seemed to be getting into trouble these days, maybe she should be reassigned to another commodity contract, perhaps one that none of the robots had ever traded before. Mrs. B smiled again and tried to relax. Of course, she would have to do a little research before she could help Hailey but she was prepared to do that. Mrs. B enjoyed research and she enjoyed helping others. It gave a meaning and a purpose to her life and sometimes offered her the opportunity to pick up a little profit on the side as a reward for her help. Mrs. B was a happy and contented woman. She really was. Hailey needed her help now and Mrs. B proceeded to help as best she could. Would any mother ever do less?

 

To send Mrs. B any thoughts you have about her buying July soybean oil with a 50 point stop/loss order once prices again close at the February 1st closing level , click here and send her an e-mail or click on her mailbox to do the same.

 

After sending Mrs. B your thoughts, suggestions, or observations, you may then proceed by clicking here.

 

            Bruce Gould

 

Always remember that stock, options, and futures trading may involve substantial risks and that past performance is no guarantee of future performance.