It seems impossible, but June 17th 2010 marked 28 years since the day we not-so-fondly refer to as the “Blowout”. To begin the story, my wife came from a little farming town in Northwest Iowa. Everyone in her little town followed the grain markets. Many traded corn and soybeans futures and a few were big traders by any standard. Several people in her home town became and remain my best friends.

My best friends there traded grain spreads during the same time I began to do well trading wheat on the trading floor. As I had a relationship with E.F. Hutton, my friends and I did our trading through EF Hutton, one of the largest brokers at the time. My friends were trading seasonal grain spreads and had made money in their trades time after time. They started with small trades, but as they became more successful the size of their trades increased. Also, as they became more and more successful in these seasonal spread trades, more and more of their friends from the surrounding area in Iowa joined them in their trading.

My best friends traded one large house account and the other people following them traded their own accounts as customers of EF Hutton. From 1981 through the spring of 1982, they made money on nearly every trade. As they made money, they increased the size of their position as did all of the people who followed their lead. By the late spring of 1982, my friends and I and all the people following them were trading millions of bushels of these spreads.

Why not increase the size?

Nearly every time they put on a trade, they made money. On the few times they lost, they had other trades that offset any losses. Trading was good. We were good.

The size of the combined positions grew with each trade until E.F. Hutton’s risk department told me that they needed us to move our entire house position, that is the positions of my best friends and me, off of EF Hutton’s books, immediately. They said that the customers, which were also in the same trades, could stay at EF Hutton, but our personal trades had to be moved. Wow, I thought EF Hutton was a big deal and here they were throwing us off their books because we were too big for them. We had already started a relationship with a great local Chicago Board of Trade firm called Kelly Grain. The people at Kelly Grain were all successful traders and they were not afraid of the size of our positions. So, we moved our house trades from Hutton to Kelly Grain. In May 1982, we put on a July/December corn spread, short the July contract.

This was by far our biggest trade ever. At the same time, we put on several other seasonal trades, Auggie/Sep soybeans and a wheat spread, as I recall. As we had a near-perfect track record on these spreads, we and our friends put on thousands of contracts. As delivery approached for the July/Dec corn spread, the spread slowly moved against us. It would go 2 or 3 cents against us one day and recover 1-2 cents the next day.

This did not seem like much of a move, but with thousands of contracts on, these daily moves were costing us tens of thousands of dollars a day, counting all of our trades and the trades of our friends. Even though the July/Dec corn spread was going against us, we were convinced that it would recover when the market came closer to delivery in late-June, so we stayed with the July/Dec trade. As we approached July, the Chicago Board of Trade Clearing Corp, became concerned that we could not fulfill our obligations as our position was undoubtedly the largest speculative position short July corn, that year. This meant that by July, we either had to liquidate our positions and take our losses or make delivery of the actual corn against our short July Corn contracts.

I remember that the manager from Kelly Grain used to call me every day and ask if we were intending to make delivery of what was, now, millions of bushels of July corn. I told him that making delivery was one of our options. One of our options – not likely, this was enough corn to fill hundreds of train cars. I am not sure that we could have found that much corn, had we even tried. Then came the fateful day –

June 17, 1982 – the Blowout.

The day started normally, but around 10:00AM one of our customers called and said he wanted to “lighten the load” and liquidate several million bushels of his position. Shortly thereafter another customer called and then another. My brother –in-law, Russ was a trader on the floor of the Chicago Board of Trade and his job was to fill our orders. However, by mid-morning our orders to liquidate the July/Dec corn spread were so large that Russ had to give a spread broker our orders, as he was overwhelmed.

By the end of the day, June 17th, we had liquidated over thirty million bushels of grain spreads. The spreads had lost more money during the process of our liquidation and we had lost much of the money in our house account. Our customers had lost hundreds of thousands of dollars, as well. At the end of the day, I was exhausted. I knew that I needed to deposit a substantial amount in our trading account at Kelly Grain the next day and I needed our customers to, also, deposit substantial amounts in their EF Hutton accounts. I thought, my god I what am I going to do? I went home and told my wife and decided to go to downtown Kansas City to see our banker. Because I was so stressed, I changed my shirt and washed my face to make sure I made a good impression with the banker. When I entered the banker’s office with my clean shirt looking as confident as I was able. He took one look at me and asked if I was going to do anything stupid. Without exactly saying it, he was questioning if I was considering suicide.

Holy smokes, here I was thinking that I looked so confident when in fact the banker had immediately seen through my façade and was concerned about me. I had not thought of suicide, but it unnerved me that he thought I looked like I might hurt myself. He asked me to explain everything to him. After he had heard the entire story of our trades and the trades of our customers, he said that he would help. He told me to get back to the office and try to round up as much money as I could from my partners in the house account and our customers. By the end of the afternoon of June 17th, I had called everyone and each one had agreed to put up all the money that was required. Everyone who said that they would come up with the money they owed, paid us. After that our spread trading was more subdued. We did not try to corner the market. All of us, startling with me, had a greater respect for what could happen when a trade went wrong. Amazingly, the trade that caused our initial problem, the July/Dec corn spread did not move very much. The fact was that our positions were so huge that even a small move in the spread cost us thousands of dollars.

So, here I am 28 years later. We were lucky that our spread did not wipe us out. It hurt us, but we were able to recover. Today, I still remember every minute of the day, June 17th. I remember how it felt. I remember the banker who was so concerned about me. I remember each of the wonderful people from that little town who, without reservation, did what they said they were going to do. My brother in law, Russ called June 17th, the “Blowout” and the name stuck. It was a blowout.

Jeff coaches traders from around the world to achieve meaningful success in their trading through his Electronic Trader Mentoring Program. You can read Jeff's trading blog at www.ElectronicFuturesTrader.com.