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Lesson 38: Mrs. B "Has a paper loss of $12.50"

On Monday, September 24th, 2001, Mrs. B's hypothetical futures buy order would have filled at the price she bid - $2.87.  The May 2002 Wheat Futures Contract traded that day between $2.88 ½ and $2.86 ½ with the settlement price for the day being $2.86 ¾.  Mrs. B's order was to buy at $2.87 even or lower and, in the normal course of events, her order would have filled because the market is not supposed to trade below $2.87 unless it fills all buy order bids at $2.87 or higher.  Sometimes this will not happen, however, if the market opens or closes within a price range where one side of that range might be below Mrs. B's bid price but there are not enough sellers to meet all buy orders.  Or, another example might be when the markets are moving "fast" and some individual buy orders are not filled even though the markets dip below a bid price.  As a general rule, however, when Mrs. B noted that the wheat market had declined to the price of $2.86 ½ she could believe that her order had most likely filled.  This is especially true when the settlement price of May Wheat Futures was below Mrs. B's bid price, as it was on September 24th, 2001.

With an entry price of $2.87 and a settlement price of $2.86 ¾ Mrs. B has (not considering any commissions she will have to pay when she offsets her position) a paper loss of ¼ of a cent.  Not a very big loss if one only buys one bushel of wheat.  You would have to cut a single penny into four pieces just to pay off the loss.  But when one buys a futures contract which calls for delivery of 5,000 bushels of wheat, ¼ of a cent has to be multiplied times 5,000 which equals the sum of  $12.50.  At the close of the day, then, on September 24th, 2001, if Mrs. B had bought the Chicago May 2002 Wheat Futures Contract; she would have had a paper loss of $12.50.  Even though she would have had this paper loss, Mrs. B is not worried.  Her thinking is that if she is going to have a paper loss at the end of her first day of trading, a loss of $12.50 is just about as small as a loss can get.  Mrs. B is going to trade this hypothetical May Wheat Futures Position using the "Choppy Market Method".  Her next report will be on September 25th, after the markets have closed for the day, when she will let you know what it is she plans to do next.

To order a copy of Bruce Gould's "Choppy Market Method" to understand "Mrs. B's" reason for picking May Wheat Futures at this time, at this price,  click here.

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Proceed to lesson 39 by clicking here.

 

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