I have been using the futures market since 1970 and options on futures since they began trading in 1984. I seldom hear of anything new in the markets other than the price going the direction opposite of my expectations. I recently had something happen to me that I had never heard of before.

It all began when I purchased $5.40 put options on December corn to protect my 2008 production. My strategy was to hold those options until expiration. I intended to eventually exercise them to get short December futures, then buy December and sell July futures. That would leave me short July futures at $5.40 plus whatever the carry was on the day I did the spread.

The spread had been trading at $.40 or slightly higher for several weeks. In early November I put in a good-till-canceled order to do the spread at $.42. The order never got filled. On expiration day, November 21, I finally did the spread for $.38. That was still historically good, just not as good as I had hoped. I then put in the order to exercise the options.

Corn futures closed the day sharply lower. December finished the session at $3.38. I figured that my exercise would be at that price, leaving me with $2.00 value in the options after paying the commission. Much to my surprise, when I got the trade confirmation by e-mail the next day, the price was $3.63, not $3.38 as I anticipated. The prices on the spread were $3.63 and $4.01. The spread price was $.38, as I anticipated. However, the settlement prices on the futures were at levels that had never traded that day. The prices shown were the closing prices for the previous day. The transactions were made on November 21, but at the levels from the close on November 20.

The whole situation had me puzzled. I called the broker the following Monday morning. He informed me that a spread trade could legally be done at any prices that were within the allowable trading limits for that day as long as the spread was correct. In this case, the spread was still $.38, but the prices shown were never traded that day. As it turned out, the net result to me was the same. I am still trying to figure out if there are any circumstances where the financial outcome would not have been as I planned.

The point of this experience is that I never assume that things always go exactly as I plan. It is important to study trade confirmations immediately to be sure that no mistakes were made. In this case, there were no mistakes, just a situation that I did not completely understand. I have my corn locked in at $5.40 plus the 38 cent spread, less the $.48 cent premium and hoped for basis of -$.30 next summer. That should leave me with $5.00 cash corn in June or July. Considering where the price is today, I am not going to complain about a little detour in my strategy!

I have been using the futures market since 1970 and options on futures since they began trading in 1984. I seldom hear of anything new in the markets other than the price going the direction opposite of my expectations. I recently had something happen to me that I had never heard of before.