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Options- Philipp Brothers Moves Into The Future

Options- Philipp Brothers Moves into the Future

December 12, 2016

Chapter 39 in the exclusive series for Dynamic Commodities- becoming a commodities trader

Options were not a typical Philipp Brothers business. Philipp Brothers was a physical commodities merchant. They bought and sold hard assets. The kinds of things one can see, feel and smell. Commodities are hard assets. As a result, they come out of wells, mines or grow in soil. These staples travel on ships, barges and trucks; consumers build things with them, power equipment or even eat them, the ultimate form of consumption.

Options are paper derivatives; they are a product of financial engineers. A call option gives the buyer the right but not the obligation to buy a specific amount of a commodity at a specific price (the strike price) for a specific period (the expiration date). The put option does the opposite; it gives the buyer the right but not the obligation to sell. Options are price insurance. Therefore, the buyer of an option is the insured party and the seller acts as an insurance company. The price of any option is its premium, just like in the insurance world.

Sid Gold ran a business in buying and selling put and call options on gold and silver. Together with his assistant Ralph Mizrahi, Sid made two-way markets in options to the market which included both customers of Philipp Brothers and competitors in the market. These included J. Aron, which became Goldman Sachs and all of the other banks and trading houses in the market around the world. The headquarters for the options business was in New York. In addition, there was a trader in London, Mark Suter, who made markets in gold and silver options during European trading hours.

Options were complicated. Sid and Ralph had hundreds, if not thousands, of positions in put and call option on their books. There were so many different strike prices and expiration dates that it was impossible to match the buying against the selling in put and call options. The business was daunting to a novice. Sid was a computer geek, which was a total necessity. Only a sophisticated computer program could put all of the positions together and come up with a net position, long or short in the underlying commodities the options represented. There were so many risks that sometimes even the computer got it wrong. However, Sid’s brain operated like a computer. As I worked in the traffic department in the precious metals department, I gained an understanding of each business but the world of options was beyond my capacity. Interestingly, that is where I wound up.

Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities


Post Series: Origin Of A Commodities Trader

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