A great view of commodity trading!!!
Provided by Bruce Gould, Author of
Bruce Goulds's Free Futures & Options
E-mail Bruce at email@example.com for more information.
There are two horses in a race. They are
equal. Neither is favored to win the race. You have no idea which horse will
cross the finish line first as you know nothing about either of them. You want
to bet on horse (A) or horse (B). Just as you are about to decide, you are told
that whichever horse you bet on, it can never be 10 feet behind the other horse
once you have placed your bet, or you will lose your money. This is true even if
the horse you select eventually wins the race. You are, however, allowed to
place your bet at any time during the race up to the last fifty feet. You decide
to bet on horse (A) and right out of the gate it falls 15 feet behind horse (B).
Eventually your horse (A) wins the race by three lengths but you have lost your
money. The furthest that horse (A) was ever behind horse (B) was the 15 feet at
the start of the race.
You know that horses often fall behind at the
start of a race and then catch up as the race continues. Is there any way you
could have placed your bet so that you would have won the wager? Of course there
is. You could have waited until your horse was 10 feet behind and then bet that
horse (A) would never be 20 feet behind. Remember you are allowed to place your
bet at any time. Why not wait until your horse is 10 feet back and then place
your bet. There is one reason why not. Your horse may never be 10 feet back and
thus the opportunity to bet on horse (A) may never arise. But is this a good
reason? There will be another race shortly. If you miss betting on the first
horse race of the day, then bet on the second. You know that this method of
waiting to place your bet works best when the horses are of equal abilities and
there are only two horses running in the race.
Gold futures are selling at $300.00 an ounce.
You are not sure whether gold will advance or decline. You believe there is a
50/50 chance that either will happen. Should you go long gold and buy futures
contracts or options or should you go short gold and sell futures contracts or
options? You have no idea. To you it is a two horse race. (A) prices may advance
or (B) prices may decline. Which should you pick? Should you bet on horse (A) or
horse (B)? One thing you do know. You are willing to risk no more than $20 an
ounce whichever way you bet. If you buy gold futures long at $300 then you plan
to place a sell stop/loss order at $280. If you sell gold futures short at $300
then you plan to place a buy stop/loss order at $320. Unable to make a decision
you flip a coin, heads you go long and tails you go short. It comes up tails and
you decide to sell gold futures short at $300 an ounce. You lay out a plan to
enter your orders so that if gold rises to $320 your stop/loss is hit and you
are out for a loss. If gold declines to $280 you will buy back your short
position for a profit. You feel it is certain that gold will do one or the other
and a 50/50 probability that it will do either first. You are now in a two horse
race and you have selected horse (B).