"Trading Places" - please explain...

buy low and sell high, but also to sell high then buy low.

craigb


Since I used to trade commodities I can tell you what happened.

The Dukes that got the copy of the report thought they had inside information and tried to corner the market before the real report came out (which would have caused everyone to do contracts with them at much higher prices).  However, when the real report came out, it was the exact opposite which meant the Dukes were now on the wrong side of the deal and Winthorpe and Valentine were positioned to fill orders going the other way while the Dukes couldn't exit their positions.

Basically, there are two points to clarify. 

The first has to do with leverage.  With commodities, you can control large contracts with very little upfront money (20:1 and even 100:1 are not uncommon).  With stocks, for comparison, the largest margin is only 2:1 meaning you still have to come up with half the money to buy the stocks (e.g., $10,000 to buy $20,000 in stocks while it's sometimes possible to control $20,000 worth of commodities with only $200).  This means it's far easier to become rich, but also far easier to lose everything.

The second point comes from what the bulk of the traders think.  If most traders believe a price will be going up, then contracts that anticipate the price going up will be more expensive than those that believe the price will go down.  Because this is a "futures" market, it's not only possible to buy low and sell high, but also to sell high then buy low.  I don't remember the exact scenario from the movie (so I'll pick one), but the Dukes could have thought (erroneously due to the fake report) that prices would be going way up so they bought hoping to sell higher (while Winthorpe and Valentine were secretly "going short").  When the real report comes out showing that the orange crops are just fine, prices drop and the Dukes start losing money fast (due to the leverage explained above).  Since Winthorpe and Valentine had already shorted the market, they simply "covered" their contracts by buying low as the prices dropped - making millions in the process.  The amount you put up as leverage is called the "margin" and when that money runs out (which happens fast if the market goes against you) you get what is termed a "margin call" which requires you to put money into your account NOW to bring it back current.  The Dukes couldn't cover the margin call and went bankrupt (at least until that scene in Coming to America - very funny for those that got the joke!).
 
Hope that helped!

SteveStrummerUK


 
Some great answers guys - I now have a handle on this 'futures market' thing, it's all making sense to me.
 
And thanks James - 'Pork Bellies' = 'Becan'

craigb


@philz

Yeah, I can go on a bit at times...  Especially when I'm talking about options and how they relate to the underlying contracts.  When I see their eyes glaze over I know I've gone a bit too far.

UbiquitousBubba


Somehow, Glazed Eyes just doesn't sound quite as appealing as Glazed Doughnuts.


"Mmmmm!  Glazed Eyes!"


See?  It just sounds a little creepy.  Try it in your next meeting (or when waking up your significant other) and I think you'll see what I mean.