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How the Comex works - Page 2
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Thread: How the Comex works

  1. #11
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    Quote Originally Posted by silverheartbone View Post
    I figured out what the heck a 'naked long' really is.

    Any holder of SLV and other like 'derivative' 'instruments'.
    That's not a fair comparison. Derivative's are purely a paper instrument. SLV is supposed to be backed by actual physical Silver. I've heard all the arguments about SLV's Silver, but at least there is supposed to be something there. That is not the case for derivatives. Now pool accounts are another matter. I have no way of knowing, but I would assume many people in those pool accounts in the past switched over to ETF's.

    I think a naked long is someone who holds long contracts and doesn't have enough money to actually take delivery. Simply meeting a margin call is enough to wipe out many Long players. At least the naked Longs are not required to go out and actually purchase Silver to cover their short contract on delivery demand. You play with short contracts and you better have the cash or Silver to back it up.
    Last edited by valerb; 20th September 2010 at 21:05.

  2. #12
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    Quote Originally Posted by Matthew Shelley View Post
    Definitions:
    Naked short: A short position without a corresponding long or hedge position.
    Naked long: A long position without a corresponding short or hedge position. (this would, by nature, include owners of the physical commodity)
    TBTF: Too big to fail. Not really a definition but a concept. (In my opinion, a grievously misguided concept. As a free market kind of guy, I would go along with Captain Kirk's comment about the Klingons, "Let them die.".)

    Saying 'it's not my job' is fine, but if you comment on something it would be good to be able to back it up. Otherwise it's idle talk.

    Matthew C. Shelley
    Commodity Broker

    As always: Trading in futures and options is very high risk investing. You can lose all or more of the money you invest. Only risk capital should be used.
    OK, I'm baffled by your definitions for naked Long and Short contracts.

    First off, It's always been my understanding that a naked short was a person who owned an short contract but did not actually own any physical Silver to back it up. If I'm wrong, blame it on Ted Butler.

    What I find puzzling about your definition is all of the naked longs and shorts not being off set. Your the expert, how does this occur and why do the COMEX numbers always equal out between the Long and Short contracts?

    Please help us understand some of the most basic concepts on COMEX trading, as most of us have never gone near the Futures market and we only know what we read and find out from others.

    1. Ask price on COMEX - My understanding is that represents anyone wishing to sell Silver at that price, rather it be someone who owns physical Silver and wants to sell it, a person wanting to sell his Long contract and Short players wanting to enter the market at that price.

    2. Bid price on COMEX - My understanding is that represents anyone wishing to buy the Silver offered by the parties selling. That would include both new long and short players.

    Now if I had my physical Silver setting in the Eligible area on COMEX and I owned it outright, how does COMEX consider that Silver when I put it up for sale. It couldn't be counted as a contract or the numbers would be out of balance. If someone were to purchase it outright for delivery, that wouldn't be a problem. However, how does a short player purchase that Silver without throwing off the balance of contracts, unless it is an outright purchase, not involving an actual short contract?

    Getting back to the basic contract. If I bought a Long contract at $21 and it creates a short contract on someone else's part, we have equal value and contracts in the market place. Now if I decide to sell my contract at $23 and assuming it's possible for a new long player to buy my contract at $23. We still have equal offsetting contracts, but the person buying my contract is on the hook at $23 and the offsetting contract is still at $21. Who pays me the $10,000 I made on my $21 contract? Is the CME group filling in the gap for these situations and counting this $23 contract as if it were only worth $21 and they have a $10,000 stake in that contract. As in this same person were to decide to sell his contract at $21 and the Short contract at $21 decided to cut his losses while he still can and buys it. Since the dollar value of both are at $21, it would be a draw for the short player and a $10,000 loss for the long player. Would the CME group then take back the $10,000 loss to break even on those two off setting contract?

    It's really easy to understand if only a short can buy a long for sale and only a short can sell a new long contract. However, throwing these other options into the mix, must make it very complicated. From an accounting stand point I can see how it can work no matter how complicated they make it. The question is, is it really that complicated or have a lot of us been mislead? All of my reading of official documents involved the COMEX inventory, the categories, deliveries, what constitutes a deliverable bar and where it can be bought to fill a COMEX delivery demand. I've always relied on others to inform me on how the buying and selling of contracts works. Nows your chance to set me and everyone else that may have the wrong idea straight.
    Last edited by valerb; 20th September 2010 at 21:06.

  3. #13
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    Valerb,

    It's going to take me a bit to respond to your post a point at a time. I will though, and I hope to finish in short order.

    Matt

  4. #14
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    Default Point at a time, let me know if I miss anything.

    Naked longs or shorts do not specifically refer to contracts, although contracts can be included in the definition.

    I'll make all references to Silver as that is the subject of the forum, although the answers can apply to any physical commodity.

    A naked long is someone who owns or obligates themselves to buy Silver without any corresponding contract or agreement to sell other silver, obligations, or contracts against their holdings. This would include you or me with Silver buried in the backyard, a miner with unhedged proven reserves or stockpiles, a smelter or assayer with unpromised inventories, a jeweler with more raw material than he has pending orders for and/or unsold inventory, certificate owners, longs positions in futures or OTC contracts, and by extrapolation ETF owners.

    Pretty much anyone who is at financial risk if the price of Silver goes down in the next thirty seconds or more.

    A naked short is the opposite of all these. Manufacturers with contracts for products which require Silver and not enough Silver in stock, a jeweler in the same position, an ETF who has more shares sold than they have Silver in hand, and short futures and OTC contracts.

    Anyone who will lose money if Silver goes up because they will have to pay up for it at a later time or date.

    There are lots of misconceptions about Silver and particularly Silver futures that I would like to blame on Ted Butler, and confusion regarding the differences between shorts and naked shorts, and futures contracts vs. certificates, vs. outrights are just the tip of the iceberg.

    1. Ask price on COMEX - The price someone is willing to sell a futures contract. It doesn't matter whether they are entering or exiting a trade, and what their position is behind that trade is immaterial to the execution of the futures trade.
    2. Bid price on COMEX - The flip side of the same coin.

    Also, a little jump ahead here, the nature of futures trading is that for someone to sell a futures contract, there must be someone willing to buy one and vice-versa. That is why the number of buys and sells is always the same.
    If there is ever a discrepancy it is called an 'outtrade' and outtrades are always cleared up before the opening bell. Whisper the words 'out of balance' in a brokerage house and you will see all sorts of people pulling their hair out. It doesn't sound like much, but I once overheard someone in a bar near the exchange mention that they were out of balance for 'three whole days' and five people nearby, none of whom knew each other, all said "Oh my God!! Really??".

    You have also asked some things that are mixing up delivery certificates and futures contracts.

    A delivery certificate is for actual silver that is held in an exchange approved warehouse. It's a piece of paper that, if you really wanted to, you could walk up to a teller at that bank and tender your certificate and they would be required to hand you the Silver for it.
    A futures contract is a obligation for future delivery that does not correspond to any specific material and is rather a promise (which can be laid off on someone else at any time) to make good on a delivery at a later date.
    If a futures contract goes into delivery, that is when the final holder of the short futures contracts is required to deliver the certificate to the final holder of the long futures contract.

    Regarding the accounting in futures trading, all accounts are marked-to-market at the end of each day, win or lose. So there is no concern that you would have to collect on someone who took a $10,000 loss in a futures trade against you because it is already in your account and the size of the amount has been there ever since the first day you took on the trade.

    Lastly. The delivery specifications, particularly in metals, are very easy to handle. Professional traders do not care whether the bar is stamped Johnson-Mathey or Engelhard, their only concern is whether it is an exchange approved weight and purity. I've heard of people in the retail market having preferences on these size bars and it affecting premiums, but at the wholesale level this never happens.

    I try where I can to clear up the misleading stuff that people hear in these markets, but sometimes I get drowned out by sheer volume. Besides, I can bore people to tears with mind numbing facts, and most of my stories are about as exciting as folding contour sheets.

    Matthew C. Shelley
    Commodity Broker

    As always: Trading in futures and options is very high risk investing. You can lose all or more of the money you invest. Only risk capital should be used.

  5. #15
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    A naked long is someone who owns or obligates themselves to buy Silver without any corresponding contract or agreement to sell other silver, obligations, or contracts against their holdings. This would include you or me with Silver buried in the backyard, a miner with unhedged proven reserves or stockpiles, a smelter or assayer with unpromised inventories, a jeweler with more raw material than he has pending orders for and/or unsold inventory, certificate owners, longs positions in futures or OTC contracts, and by extrapolation ETF owners.

    Are you saying that for those of us that have silver buried in our backyards, we would be considered naked longs "if" we were to take out a Long contract? We wouldn't be considered naked long for simply hiding Silver at home, would we? Just trying to clarify that one point!

    Regarding the accounting in futures trading, all accounts are marked-to-market at the end of each day, win or lose. So there is no concern that you would have to collect on someone who took a $10,000 loss in a futures trade against you because it is already in your account and the size of the amount has been there ever since the first day you took on the trade.

    I follow that when simply dealing with the same two parties, however the question I was asking is if a Long could purchase another persons Long contract if he decided to sell it at a higher price versus a short player being required to close out his short contract to equal everything. So I guess the only way to make sure I'm understanding this correctly is to do it the long way.

    Long player A enters the market at $21
    Short player A enters the market with an offsetting contract for $21

    The price of Silver jumps to $23

    The records now indicate Long player A's contract is now worth $23, up $10,000
    The records now indicate Short player A's contract is now at $23, down $10,000

    Long player A decided to sell his contract and Long player B buys it at $23.
    Short player A would still be in the market at that point with a negative balance of $10,000, while Long player B would be in the market with a balance of $0.

    If the market where to drop back down to $21 and Long player B decided to sell and Short player A thought it would be good to jump ship at this point and call it even. The market would be all square, as Long player B would have to pay back the $10,000 Long player A took out of the market and Short player A would break even. Which is my original example.

    Obviously Short player A would not have to pay the $10,000 taken out of the market by Long player A when he sold his contract to Long player B, even though his account is at a minus $10,000. My original question was, does the CME group just pay and collect the gains and losses as these contracts are closed out or sold, knowing that the dollars are still in balance on their books? As in they paid cash up front to Long Player A, but Short player A in on the hook for an offsetting amount to balance the amount already paid out.

    You seem to be saying this, but not exactly. I just want to make sure I fully grasp what they can and can not do, as in this example. From an accounting stand point, it could get wild and hairy, but it would all balance at the end of every day.

    I try where I can to clear up the misleading stuff that people hear in these markets, but sometimes I get drowned out by sheer volume. Besides, I can bore people to tears with mind numbing facts, and most of my stories are about as exciting as folding contour sheets.

    It's those mind numbing facts that help those of us who are really interested in how the market works, wade through fact from fiction. The above question is simple to answer, but to find out how this works on the COMEX would require a lot of digging for one single question. I realize it is much more complex than my example, throwing in things like margin calls and such. It's just the general concept that I'm interested in, as in, do I have the right understanding in general or not.

    Thanks,

    Vale

  6. #16
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    Regards your first question. If we have unhedged Silver buried in the back yard, we are naked longs just the same as a miner who has unhedged proven reserves buried in his mine. Just a matter of scale.

    To your second. Marked-to market daily means that market price changes in dollars (or whatever other currency a contract is denominated in) are paid to or collected by the exchange at the end of every day. The exchange is the buyer to every seller and seller to every buyer so the specific identity of the opposite side of your trade or their profit/loss is irrelevant. This plays into some of the games that can go on in OTC markets that would instead earn a commodity broker a pair of nice shiny stainless steel bracelets.

    Matthew C. Shelley
    Commodity Broker

    As always: Trading in futures and options is very high risk investing. You can lose all or more of the money you invest. Only risk capital should be used.

  7. #17
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    Quote Originally Posted by Matthew Shelley View Post
    Regards your first question. If we have unhedged Silver buried in the back yard, we are naked longs just the same as a miner who has unhedged proven reserves buried in his mine. Just a matter of scale.

    To your second. Marked-to market daily means that market price changes in dollars (or whatever other currency a contract is denominated in) are paid to or collected by the exchange at the end of every day. The exchange is the buyer to every seller and seller to every buyer so the specific identity of the opposite side of your trade or their profit/loss is irrelevant. This plays into some of the games that can go on in OTC markets that would instead earn a commodity broker a pair of nice shiny stainless steel bracelets.

    Matthew C. Shelley
    Commodity Broker

    As always: Trading in futures and options is very high risk investing. You can lose all or more of the money you invest. Only risk capital should be used.
    Thanks Matt
    I'm a proud member of Eggshellman's Liar, Shill, and bully club and a new member of the Super Jew Defense League!!!

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