/NGU5 short strangle

My newest trade involves trading options on natural gas, symbol /NG. I’ve been studying how the natural gas market works, gathered my findings in my NG trading guide, so I’m semi-confident in my knowledge of this market.

The details of this trade are as follows:

Symbol: /NGU5
Status: opening trade
Strategy: short strangle, SEP 15 2.5 P /-\ SEP 15 3.3 C (market at $2.895)
Contract size: 2
Days to expiry: 36
Max profit: $820

I sold 2 contracts each, as selling in multiples of 2 allows for more room to adjust if needed.

Trade reasoning

The fundamentals are mixed. Hot weather is coming in the US, which raises demand, but supply is also exceptionally high, as seen here. Last Thursday, the EIA reported a net increase of 99 Bcf from the previous week, with stocks 653 Bcf higher than last year at this time, 73 Bcf above the 5-year average of 2,694 Bcf.

Thursday’s report is expected to show a build in supplies of around 60-65 Bcf, so there is definitely a lot of supply.

Natural gas has been stuck within a well defined channel for quite a long time now, and I was able to short outside it and outside the 67% probability of expiry cone at an acceptable credit.

Prices are still at the bottom of their five-year range for this time of year, which will have some investors buying on the low. But as those buyers bid up prices, others soon will look at the near-record supply and sell. Limbo = short strangle opportunity.

The delta of the call side is higher than the 10% I like to use, which would have been 3.4. I decided to go with 3.3 instead, and risk a delta of .14, because it is still so far above the channel in which NG has been trending.

Volatility isn’t particularly high though, I hope that won’t cause problems.

I have a lot of room to maneuver in case the price goes against me. My call strike price is 14% away, and the put strike price is 13% away.

This is my first NG trade, so I’ll be monitoring it closely, to see what happens, and what I can learn from it all. If needed, I’ll adjust the strangle. Time will tell.

I have no clear buy-back or roll-in strategy as of yet, just waiting for my friend Theta to do his thing.

UPDATE #1: 07/30/2017

NG has stayed in it’s range during the last 9 days since I opened the trade. It is trending slightly lower, so I decided to close the call leg of the short strangle, since it has already reached 81% of it’s potential profit, and roll it down to 3.1. It was at a delta of 4%, and theta was already very low.

Trade adjustment:

• Buy to close /NGU5 3.3 C @ 0.004 (opened for 0.023)
• Sell to open /NGU5 3.1 C @ 0.012

This brings the call delta to 10%, brings the max profit up to $980, and results in the following risk profile on TOS:

I made a rather dumb mistake while placing the trade though, which cost me extra commission. I only placed the short call for 1 contract, not 2, as per the original. I noticed this right away, but by the time I could have cancelled it, the limit order was filled, so I had to enter the trade again.

The price of NG has moved a bit closer to my put strike price of $2.5, which is still 8% away. I set an alert for $2.6.

It is very hot in the US right now, but forecasts are for cooling weather, so that’s weighing negatively on prices. Also, oil is dropping, that might have something to do with the drop in natural gas prices.

Anyhow, the price of NG is trading well within the expected range, so all is ok with this trade for now.

Update #2: 08/13/2015

I closed all of the open positions I had for /NG today, for a total profit of $760. The max profit would have been $980, so I took profits at 77% of maximum. I still had 2 weeks to go to expiry, and even though the price of natural gas was pretty much right in the middle of the short strangle, I didn’t want to risk it. /NG is a volatile commodity, just today, it dropped almost 4%, after rising 3% yesterday.

Trade summary – Profit of $760

I held the position for 22 out of the original 35 days (61%), and put away 77% of it’s maximum profits.

I had 1 modification, which in the end, didn’t really cause much extra premium. I was checking the risk diagram to see what would have happened if I wouldn’t have modified the original strangle. Up till today, it wouldn’t have resulted in extra gains. It did today, by about $40, so not really worth the increased risk I took narrowing the strangle.

/NG has been moving in a nice channel for the last few months. I was going to sell another short strangle with a later expiry, but the IV has been going down, so it’s not an ideal time to do that.

I don’t know what my next trade will be, since oil is dropping like a knife (at it’s yearly low right now), NG is not expensive enough, so we’ll see.