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Better late than never!
Take a look at Part I of my interview form the NYSE with Mike Norman…And then read below for my latest thoughts on the latest from the folks at RTA!
http://www.hardassetsinvestor.com/?utm_source=google&utm_medium=cpc&utm_term=hard+assets&utm_content=Hard+Assets&utm_campaign=Hard+Assets
So just a quick update from here at the epicenter of commodities trading, Chicago. I will be on the floor of the CBOT most of the day and trying to get updates on the grains and other markets. The rain in the Midwest is easing some immediate concerns but overall I think the crop is going to support higher prices. A note on the most recent alert from the folks at RTA. Now I suggested about 2 weeks ago here on my blog to cover the short side of both the gold and bean oil, bean oil was a no brainer but gold did add some more significant cost, but not much. Glad they have now advised people to cover those short legs. Problem is whomever is writing the issues now didn’t really explain it well. As I visit with many of the brokers here in Chicago many of them told me that they got a ton of calls asking how this all works and the ramifications of covering the short legs.
I saw my friend Bob Miller at Foremost Trading yesterday and his sons Scott and Mark and he explained it very well to his clients…exactly as RTA should have but didn’t of course. Associate Editors are not traders, I am sorry but you can’t replace years of trading experience by making a few phone calls, that’s pretty obvious. Anyway, all that aside, covering the short legs of the spreads is exactly what should be done. Here is Bob’s explanation on the pro’s and con’s of covering the short legs, it spells it out very well. This is provided as a courtesy as i have nothing to do with RTA anymore and I know many of you are confused with the way Agora Financial has handled this and why they don’t have a new trader, so check here form time to time and you can get my opinion on these trades until their closed. Better yet join us over at GCA and I will be following all these markets there.
From Bob Miller for my former RTA readers…
RTA Alert: ½ Bean Oil spread and ½ of the Gold spread (legging out) exit fill report. 9-3-08 update.
This email is for those who are Trading the RTA newsletter with us at Foremost Trading. Excuse the “bulk nature” of this email, however by this method I can let you know what has happened with the order(s) received from RTA newsletter.
Hello RTA Traders.
Today we received this RTA alert which read…
Urgent Trading Alert – Buy-to-Close Gold and Soybean Oil
Action to take: call your commodity options broker and say “I have two orders for you, First I want to buy-to-close the short leg (the 1050 call) of the December 2008 Gold (GCZ8) call spread at 310pts ($310) or better Good Till Cancelled (GTC).
Second, I want to buy-to-close the short leg (the 70 call) of the December 2008 Soybean Oil (BOZ8) call spread at 40pts ($240) or better Good Till Cancelled (GTC).”
We received this RTA trade alert and acted on it with a fill in the gold at the trade alert price of 310. The bean oil alert fill was at a average price of about 32.
I am sending this email to you that the bean oil trade and sending again this same email to those of you that have the gold spread. So if you receive this only once or if you receive it twice you will understand why.
Here are some pointers that I want to make about these trades…
When a bull call spread is entered, the trade has a maximum potential. The full profit potential is the value of the difference between the strike prices minus the cost of the spread. This maximum potential is only possible if the underlying futures contract is at or above the higher strike price of the option spread. The reason for a bull call spread like the gold or soybean oil spread trade is very simple. The outright option is too expensive. Hence a spread that is affordable. The price you pay for this is a maximum profit cap.
With today’s exit of ½ of the spread we now have a new picture. Here are some of the issues (costs and benefits) if exiting ½ of the trade that was issued today.
First. By exiting the short side of the spread you now have locked in much of the profit on the short side of the spread. That’s good.
Second. This did have a cost. On the bean oil the cost was about $190 per spread. That’s the price paid to exit the short today on the Bean oil 70 call. On the Gold it was $310 to exit the short 1050 call. This cost is an additional expense to the original trade. For this cost you now have a additional benefit which is…
Third. By exiting the short side of the spread like we did today, the maximum profit potential has now been removed. Now I have to tell you that even though the maximum profit potential has been lifted, we need to be realistic. These original spread trades that have now become an outright long call option have a long way to go to recover the open loss that they have. This brings me to the next benefit of exiting the short side of the spread trade as we did today.
Fourth. When the spread is in place, the spread difference moves at a slower rate. When the market is dropping or when the market is rallying. By exiting the short side of the trade which we took in a nice profit today on that half of the spread, we now have a better chance to recover the open loss that we have on the remaining half of the spread trade. Exiting the short side of the spread is like lifting the anchor on a boat. The option price can now move much more rapidly on any up move in the Gold and Soybean oil market.
We have nearly three months left before expiration of these options. Anything can happen. Hopefully the market will bless this remaining half of the trade.
Have a good evening,
Bob Miller
I want to also remind you that you can always change any of the instructions that you have with me at any time on the Auto Trade application of handling of your orders.
Please note. I try to be very accurate with the details of reporting to you. This email is not the official trade report to you. The official report is your brokerage statement from our clearing firm. That is sent by email the next day. You should have this tomorrow morning. If you should get a statement and you are not sure about the details of the trade, or you do not get a statement from the clearing firm on this trade please email me. I will look into it and reply as soon as I can.
Foremost Trading LLC.
Toll Free: 1-888-262-6455
International: 1-630-463-4510
email: BobMiller@TheFuturesBroker.com
