.jpg)
The Commodity Broker -
By, Milton Laene Araujo - Chapter 1-
By, Milton Laene Araujo - Chapter 1-
Chapter
1 – October 2007
Trim, trim, trim… rings the telephone at Mr. and Mrs.
Jenkins residence. “Bob, are you expecting any calls?” Mrs. Jenkins said while
turning the stove top slightly down. She
cleaned her hands with a dish towel and hurried towards the telephone, which
was placed on the hall between the kitchen and the dining room. She cautiously
checked the number on the caller ID with no avail. It displayed “No Caller
Identification.” Reluctantly, she picks
up the receiver.
“Jenkins’ Residence, this is Susan”
“Hello Mrs. Jenkins, my name is Sofia…. am calling to speak
with Mr. Robert Jenkins, is he available?”
“What is this about?” Asked Mrs. Jenkins already annoyed with
so many unsolicited phone calls they have been receiving lately.
“I see here that Mr. Jenkins showed some interest in getting
involved with the Markets, and I would like to have a few words with him before
I put all the information he solicited in the mail”
“Just mail it”, said Mrs. Jenkins with her mind on the
simmering cooking pan of stew she left unattended on the stove.
Robert Jenkins was seated on his favorite blue
chair, less than five feet from the telephone, but he has refused to answer the
phone since they had it installed in their place fifty or forty years ago.
Telephone answering was for secretaries, and at home, it was his wife’s
department. He liked his calls filtered to the max, and only gave the time of
the day when matters were important. For some reason, he felt that this one was
important. Not exactly for the caller, or least to say the call, but for the
look of disdain his
wife showed while tapping her waist with her free hand to
call his attention, and also, to make clear that she was cooking, and it meant
serious business for her. “I will take it” said Bob going in direction of the
phone, and taking that time to kiss his wife on the forehead, before taking the
phone she just left up-side down.
“I understand Mrs. Jenkins, but as you know I have to make
sure we have a real person who is truly interested in this type of
investment…which is not for everybody…” Sofia was interrupted by a male voice.
“This is Bob Jenkins, how may I help you?”
“Oh Mr. Jenkins I am glad I got you there! I just said to
your wife that you have showed interest in getting involved with the commodity
market, and I want to ask a few questions before I put all the information you
solicited in the mail.”
“Go ahead” said Bob.
“Uh… my name is Sofia Keller and I am calling from Stonegate
Financial Services, here in Delray Beach, FL. I am calling because I received a
request for information about exchange traded options, and I wanted to give you
the courtesy of a phone call today to let you know that I will be mailing the
material you requested first thing tomorrow morning. Mr. Jenkins. Have you ever
invested in exchange traded options before?
“How did you get my number?”
“I got your number from a listing of people who either have
or not invested in the market before, who completed some sort of internet
questioner in this regard. Could that be possible?
“Oh, yes, I have, but it was a long time ago, gosh, I have
forgotten it.”
“I will be mailing the material you requested first thing
tomorrow morning. So tell me Mr. Jenkins, have you ever invested in exchange
traded options before?
“Yes, once or twice in the past, I think…”
“I am sure you realize that timing is the key to making
money in any investment, don’t you?”
“Uh hum”
“That’s especially true in the options market. For example, our research is focusing in on
what we believe is a tremendous opportunity that exists in the HEATING OIL
market” … Sofia got some air and went on… “Who generally makes the decision in
your household; you, your wife or both of you?
“It depends. If it is investment I do.”
“Now Mr. Jenkins, we believe this opportunity exists for
three basic, but nonetheless important reasons. One being that the Department
of Energy reported crude oil stock fell 8 million barrels compared to last
week’s level. At this time of the year we should be building our inventories,
but we are not. Considering that there is no demand of heating oil in the
middle of the summer. And we can’t build it during the winter season. What do
you think it does to the heating oil prices?
“Probably will go higher,
“That is correct Mr. Jenkins. What have you heard about heating
oil so far this year?” Sofia glanced through her notes were it said: Listen
to the client get a response…You must have heard something, maybe in the
newspaper or on TV?”
“Let’s start with some basics: obviously the idea here is to
buy low and sell high…Make sense?”
“Uh hum”
“Now, if I was to ask you when the Heating Oil prices will
be the cheapest, when would you say that will be?
“Now, during the summer I suppose!”
“Obviously now because nobody is using it, better yet,
nobody is even thinking about it. Now, Mr. Jenkins, if I were to ask you when
you thought Heating Oil is in the highest demand, what would you answer?” … get an answer of Cold Weather or Winter.
“That’s right! Right before winter, or during the winter
season, because of the cold weather people tend to heat their homes more than
during warmer times of year, demand goes up…and makes the price go up…Dos it make
sense?”
“Yes!”
“We believe this is going to happen this year for three key
reasons and you are going to want to write these down. Grab a pen and a piece
of paper. I wait”.
“I have it here”.
“OK. One is Supply,
second is demand and the third is
the U.S dependency on foreign oil.
Do you have these down?
“I have Supply and Demand and Dependency of foreign oil. Is
that what you said?”
“Yes, it is Mr. Jenkins. The refinery system in the U.S is
old and unreliable at best. And because of this, refineries in the U.S. are
having trouble taking crude oil and turning it into byproducts such as unleaded
gas and heating oil. And because they’ve been trying to keep up with gasoline
demand, they’ve neglected to refine heating oil ahead of this year’s winter
demand, leaving us with dangerously low Heating Oil supplies that are
considered insufficient by many experts…Mr. Jenkins. If you have inadequate Heating
Oil supplies, you can see how that would move prices higher. Don’t you?”
“Yes.”
“Obviously, the colder the weather gets, the more people
need to heat their homes, therefore the more heating oil people will use as a
result. Make Sense? Now, as the winter approaches, we are headed into a peak
demand period, where we may use the majority heating oil for the year! This
excess increase in demand, in my opinion, is going to push prices far past last
year’s record setting heating oil price of $2.45 per gallon! Do you follow me?”
“Yes, it is interesting Sofia, please go on.”
“Thanks Mr. Jenkins. If at any time this is boring you,
please let me know, he, he, he, but when I start talking about this I just go
on… Are you familiar with O.P.E.C. and what it stands for? O.P.E.C. is the
Organization of Petroleum Exporting Countries. Such as Saudi Arabia, Kuwait,
Iran and so on…40% of the world’s oil is located there. Starting on January 1st,
they cut oil supplies by 1 million barrels per day to keep prices high. Does it
make sense the higher the price of Crude Oil, the more expensive is to refine
it into byproducts like Heating Oil, rubber, tires etc.” …
“It does.”
“Now there is one more thing to take into consideration, and
that’s the Wildcard of Middle East Tension. Considering that more than one
third of the world’s oil is located there, any supply disruption could create
massive prices spikes. That being said, if the wrong bullet hits the wrong
politician or if an oil pipeline is sabotaged, it could create fear that there
will be a supply disruption of oil flow from the Middle East to the rest of the
World, You follow me?
“Dang, I was not aware of all that, I mean, I hear it on TV
and stuff but I did not know much…”
“Now Mr. Jenkins, in my opinion, any one of these factors
alone could move the price of Heating Oil 15 to 20 cents per gallon higher.
However right now, I feel we are experiencing all three. You follow me?
“Yes.”
“Good! There are two ways you can invest your money into
this market. One way is called futures trading; in fact write that down,
FUTURES. And the other is known as options trading. Write that down as well,
OPTIONS. Now, with the Futures trading you have unlimited profit potential,
however, you also carry an unlimited risk. Meaning Mr. Jenkins that you could
lose more money than what you originally invested. I don’t even advise my
wealthiest clients to get involved with futures. The investment vehicle that we
use is OPTIONS, in fact just so you don’t confuse the two, circle the word
options on your paper. Options also give you unlimited profit potential;
however they carry a limited risk. Meaning your risk is limited to what you
decide to invest. Based on that you as the investor can set the amount of risk
you are willing to take on, Make sense?”
“Yep!”
“There are two keys to making money in these markets. Write
these down, please: LEVERAGE and TIMING. Do you have that written down?”
“Yes”.
Let’s start with the leverage. What I am going to do is give
you a hypothetical example of how this market works to show how you can
potentially profit if things turn out as we expect. If you love the numbers I
show you…what is the most you can put behind this recommendation, Could you
handle $10,000?
“Sure”
“Where would that money be coming from?”
“I have it in the Bank as I have other investments”
“So, in other words, you could write a check for $10,000
today if you wanted to get involved with this investment?...I don’t want to
overextend you. You have more money behind this, meaning, this isn’t the money
you use to pay the bills with, is it?”
“Yes, I have other investments”
“Good, so you consider this money to be risk capital,
Right?”
“Yes”
“Great, $10,000 will buy you 10 Heating Oil Contract
Options, write that Down…
$10,000 = 10 Heating
Oil Options”
“Done”
“Mr. Jenkins, every single one of these options gives you a leverage
over 42,000 gallons of Heating Oil. Write that down…
42,000 gallons per
option”
“Done”
“Now, do you remember that before I told you I was looking
for the price to rise 15 to 20 cents from here?”
“Uh hum”
“Good, based on that type of options we’re buying we’ll be
looking to catch a fraction of that move in profit. So for example, let’s say
we just catch a 5 cent move in our option. Write that down…
…write down, 5 cent
move per gallon.”
“Done”
Now if you made 5 cents per gallon on 42000 gallons…write
that down…
5 cents per gallon X
42000 gallons = $2100 per option”
“Done, but it sounds too good to be true”
“I haven’t finished
yet, Mr. Jenkins, but how many options did we say we could buy with $10,000?”
“10”
“Right” 10, so on the next line write down…
$2100 per option X 10
options = $ 21,000.”
“Wow!” Said Mr. Jenkins
“Write that amount down and circle it. That’s $21,000 to you
if things work out as I plan. Tell me, is that the kind of return you were
looking for when you requested the information?
“I never saw things this way Sofia. I usually let my broker
do the work and I trust him.”
“Understand this Mr. Jenkins, my motivation is to make you
money and built a relationship with you. Now, what I just gave you was the good
news, the so called cherries of the investment. However, I can’t just give you
the cherries without also giving you the pits of the investment as well. It is
the risk. The risk of this opportunity is that you could lose all or part of
the original investment, but never pay a penny more. Understand?
“Yes, like in all investments”.
“Now, there is a risk management tool that we can use on your
acct. Known as stop loss order. Are you familiar with a stop loss?”
“Not really.”
“Not a problem, let me explain it, a stop loss is an
automatic sell trigger that is attempting to limit your losses should the
market move against your position. We set the stop option around 40% of the
original investment, so based on the amount you’re considering, we would set
the stop to attempt to limit your losses and protect about $4,000. So you
understand stops are not guarantees, they are attempts, if the market moves
dramatically against you, you may protect less than $4,000 or on the other
hand, if the market rallies back up after the stops been triggered, you may get
more than $4,000. However, in my experience, when the stops work properly we
will get out of the market protecting what we are originally expecting. Make
sense?”
“Yes, it does. Why no one ever explained this to me before?”
“I can’t answer that Mr. Jenkins, furthermore, as our firm
finds additional opportunities, we will advise you so that you might take
advantage of other situations that we believe will offer you similar profit
potential. You’d like that. Right?
“Yes”
“Mr. Jenkins, remember I told you that there are two keys to
making money with these markets. They are Leverage and timing.”
“Uh hum”
“We’ve pretty much covered all the leverage. The other key
to money making is timing!... and the time on this investment Mr. Jenkins, is
right now… the reason I bring up timing is that these markets move quickly. One
of the most important parts of my job is to position you properly in this
market, and with the news that’s out I think we can turn a quick profit on your
$10,000 investment in just the next 2 to 3 weeks. You’d like that right?”
“I don’t think I am ready yet”.
“If you need to take your time, just remember that once this
news gets get absorbed by investors, everybody will be buying into this market.
That’s why the more seasoned investors are buying now, in anticipation of the
move. Of course I realize not everybody can make a decision right now, but let
me ask you, if you had this information in front of you and it all makes sense.
How quickly can you act on this investment…If you loved it could you get
involved today or tomorrow?”
“Hey Sofia, my wife is calling me to eat lunch. Can we talk
more after lunch?”
“Absolutely Mr. Jenkins, but before you go, let me give you
my information.
“Sofia, where are you from?”
“I am originally from Brazil, but I have been in America
since 1988 Mr. Jenkins. I know it sounds funny when I say WE, referring to
America, but I am an American as well. My accent will stay with me for as long
as I live. “
“I kind of like it Sofia. You sound sincere and
knowledgeable”.
“Thanks Mr. Jenkins, but before you leave, I want you to have the NFA web site. There
you can see who I am and where I am working. Are you ready? Ok. Please jot down
this information for me: My name, Sofia Keller and my NFA ID is 0385773. My
number here is 561-330-2332. The site is www.nfa.futures.org
, and the other I want you to check is www.barchart.com . The second one will show
prices of commodities today. Check them both out.”
“I will call your
number and ask for you directly.” Until then!”
“Click!”
Continue on Chapter 2 -
Chapter 3 http://miltonlaenearaujo.blogspot.com/2013/08/the-commodity-broker-chapter-3.html
Chapter 6 – 7 http://miltonlaenearaujo.blogspot.com/2013/08/the-commodity-broker-chapter-6-and-7.html
