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Lesson 48: Mrs. B is stopped out

On Wednesday, January 16th, 2002, Mrs. B exits from her long position in the Chicago wheat market.  Her stop/loss for May wheat was hit on that day and she was taken out.  You may recall that Mrs. B's stop/loss order was the following:

"Sell l contract of Chicago May Wheat at $2.99 ½ /Stop - Open Order Good Until Changed or Cancelled"

On Wednesday, January 16th, May Wheat Futures in Chicago traded within the following price range,

Highest price of the day was $3.03 ¼

Lowest price of the day was $297 ¾.

Mrs. B's stop was hit when the market declined to $299 ½.  For the sake of this illustration we will assume the worst, that Mrs. B's order to sell her 1 contract of Chicago May Wheat once her stop was hit was filled at  $297 ¾.  In futures trading, it is often a good thing to plan for the worse case scenario so that one won't be surprised when this actually happens.  In the January 16th, 2002 world, however, Mrs. B's stop  would have become effective at $299 ½ and she would have probably been taken out of the market at around $2.99.  Since there is no way of knowing for sure, we will assume that Mrs. B got out at $2.97 ¾, at the lowest price of the trading day.  Mrs. B purchased her wheat contract on October 17th, 2001, at the price of $2.90 ½.  If she sold at $2.97 ¾, she made a profit of 7 and ¼ cents.  Because each 1-cent price move in wheat has a value of $50.00, Mrs. B earned a gross profit from her trade of $362.50.  From this gross profit she must subtract her commission and any fees that she has to pay for this transaction.  Mrs. B's net was probably in the $300.00 plus or minus range.  We will use $300.00 as her net profit, though, in the real world, she would probably have made a few dollars more.  In the previous lesson it was predicted that January 15th, 2001 would be a key day for Mrs. B.  It turned out that this prediction was off by one day; January 16th was the day Mrs. B's stop was hit. 

Once her stop had been hit and she was no longer the holder of a long futures position in Chicago wheat, there was the other open order that Mrs. B had to take care of.  This was the open order that Mrs. B had to sell her long Chicago May Wheat position on strength.  That open order read as follows:

"Sell l contract of Chicago May Wheat at $3.47 or higher. This is an Open Order Good Until Changed or Cancelled"

As this is an open order (meaning it remains effective so long as trading in the 2002 Chicago May Wheat Futures contract continues) it must now be cancelled.  Mrs. B has sold her May wheat position at $2.97 ¾ and she no longer has any May wheat position to sell at $3.47.  To cancel her open order, Mrs. B simply calls her broker and tells her broker to,

"Cancel my order to sell 1 contract of Chicago May Wheat at $3.47 or higher".  The order is cancelled.  Mrs. B is out of the wheat market.  She has no open orders and no open positions.  Her net profit for her wheat trade was in the $300.00 range.  Her futures contract was held approximately three months or 90 days.  She "let her winner run" just as she was supposed to do.  Her winner did not run as far or as fast as she might have liked, but it did run and it did run in her favor.  She did exit with a profit.  "Small successes" is how Mrs. B put it.  A small success is better than no success and a small profit is better than no profit.  Mrs. B is relatively content, all things considered, with her trade.  She is about to enter the market again and this time she will move more quickly.

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            Best Wishes,
            Bruce Gould

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