Lesson 41: Mrs. B - Makes a Bold Move
On Thursday, September 27th, 2001, the Chicago May 2002 Wheat Futures Contract closed
at $2.88. Mrs. B's purchase price was $2.87. After the close on this
day, Mrs. B called her broker with the following non-formal order:
"Buy 1 more contract of Chicago May Wheat Futures for me tomorrow "at
the market, on the close" - if and only if, May Wheat Futures close tomorrow
at $2.90 or higher".
Mrs. B will be the first to admit that this is not a formal order. You will
not find this order listed in exactly this way in any books on futures or options
trading. But it is an order and it is an order Mrs. B's broker can make an
attempt to fill. It will require Mrs. B's broker to monitor the wheat market
during the last ten minutes or so of trading on Friday, September 28th, and then
to make a valued guess as to whether the "if and only if" condition will
be met before he sends the order to Chicago. Mrs. B's broker replied to Mrs.
B in this fashion. "I will try to place your order tomorrow if you won't
hold me responsible in case I make a mistake and the order does or does not fill
at the price it should". Mrs. B's calm response was, "I won't hold
you to it, just do the best you can". With that her broker accepted the
order.
How might a mistake be made? Suppose that 5 minutes before the close tomorrow,
the May 2002 Wheat Futures Contract is trading at $2.90 ½. The broker
enters an order to "buy 1 contract for Mrs. B 'at the market'".
In the next 5 minutes the market drops to $2.89 ½ and the order fills at that
price. Clearly this is below Mrs. B's "if and only if" price.
Another example might be to reverse the above numbers. Five minutes before
the close the Chicago May Wheat Futures Contract is trading at $2.89 ½.
Mrs. B's broker does not enter a buy order because he incorrectly guesses that the
market will not close at $2.90 or higher. The Chicago May Wheat Futures Contract
closes at $2.90 ½, but no order to buy was ever entered by the broker.
Will she be upset? No, clearly not. She has told her broker, "Watch
the market near the close, use your best judgment, I will accept whatever happens."
"Just do your best", is how Mrs. B put it, adding, "Let's give it
a try and see if I can buy a second contract if the market closes at $2.90 or higher
tomorrow".
The $2.90 ½ and $2.89 ½ examples are, of course, ones where the market
is trading near $2.90 within the last five minutes of the trading day. If
the market is trading at $2.95 or at $2.85, or some other number far away from $2.90,
then is little doubt that Mrs. B's order will be entered or not entered with little
chance of error. Why is Mrs. B trying to buy a second contract and what is
she going to do if her order fills and she has doubled her position by tomorrow's
close? To find out the answer to this question, check the next lesson.
Do you think Mrs. B's decision to possibly double her wheat futures position tomorrow
on the close is a good decision? To register your opinion, click here.
Proceed to lesson 42 by
clicking here.