/NGX5 short strangle

Today, I opened a short strangle on the upcoming month contract of natural gas.

The details of this trade are as follows:

Date Inst. Mark. # L/S Strike C/P Price Δ Days Max profit Comm. Close P/L
1 8/31/2015 /NGX5
(november)
2.76 2 short 2.3 P 0.018 -0.09 57 $980 $7.42
2 short 3.2 C 0.031 -0.16 $7.42
2.1 10/02/2015 /NGX5
(november)
2.44 2 long to close 2.3 P 0.054 -0.28 25 $7.42
2 long to close 3.2 C 0.004 0.03 $7.42
2.2 10/02/2015 /NGX5
(november)
2.44 3 short 2.1 P 0.013 -0.09 25 $510 $11.13
3 short 2.9 C 0.010 .08 $11.13
3.1 10/27/2015 /NGX5
(november)
2.14 3 long to close 2.1 P 0.024 -0.40 1 $7.42 Put closed
Call expired
-$210
3 expired 2.9 C 0.000 0.00 $0

Following my previous successful trade in NG, I’ve been looking at it ever since.

Trade reasoning

/NG has been trading in a fairly narrow channel for several months now. The summer hot season is more or less over, so demand should not be a catalyst towards higher prices. Even if an unexpected heat wave comes, it won’t raise demand as much, as to put my strangle in jeopardy.

ngx5-chart

Actually, I fear for the bottom leg of the strangle more. Demand is not very high, but supply is strong. The market seems to be balanced right now, so hopefully the contracts will expire worthless.

ngx5-options-chain

As you can see, implied volatility has dropped recently. That is not good news at all, I should have opened the trade on Friday. I decided on opening it despite the low IV, since I want to get out of NG before the winter months. You never know what can happen during the winter. By the way, this year is supposed to be a strong El Nino year, which should lower demand for natural gas during the winter.

ngx5-risk-graph

My real strategy with this trade is to actually close it off 1 month from now, after time decay does it’s job. Here is the risk profile from TOS, with the date set to +1 month.

ngx5-plus-month

The profit range will be pretty wide already, and if nothing significant happens, I should be able to put away a hefty profit without having to wait for the contracts to expire, or even have to manage the position.

So the waiting game starts now, let theta do its job.

Update #1: 10/02/2015

Natural gas has been trending lower for a few weeks. It is the fall season, production is unchanged (pretty strong), but demand is less, since neither air conditioning, nor heating are driving demand for NG.

clz5-chart-adjustment-1

I was actually thinking of adjusting the entire position, shifting it lower last week, but didn’t. Demand was dropping, and the NG market is keen on pricing any and every movement in temperature. I should have shifted my profit zone back then, when it would have resulted in even more potential profit.

I made the adjustment now, but the new strangle position isn’t looking as good, as it could be.

clz5-risk-profile-adjustment-1

I’ve been sitting on my hands, waiting for a correction, but it didn’t come. I didn’t want to wait any longer, since the delta on the lower leg of the strangle reached -0.30.

I had to narrow my profit zone, and sell and extra option on each side, to keep the potential profit at an acceptable level.

The funny thing is that a few days ago, the position was already at a $500 floating profit. I didn’t close it or modify it, even though the downward trend was obvious, both technically, both fundamentally. Lesson learned!

Update #2: Trade close and expiry at a loss: -$210

The last few days have been absolutely brutal for natural gas. Prices have dropped around 20% in 3 days! Yes, 20%!

My position was at a $500 profit on Friday, on track to make the maximum profit. I thought about closing it, but since it had 3 days to go till option expiry, and it was in the middle of the strangle range, I didn’t.

And BAMMM!

We got some news of weather not cooling, and natural gas reserves will reach an all time high in a few weeks, and the market went crazy.

ngx5-close-chart

Unbelievable.

What’s more, I was on a weekend vacation from Friday to Monday, so I couldn’t even deal with things normally.

I closed the put leg at .024, and let the call leg expire today, making a loss of $210. Instead of a huge profit just a few days ago.

ngx5-close

Lessons learned:

  1. Manage your winners. Anything can happen, like it just did! I could have closed this position once theta slowed to a crawl a few days ago, but didn’t, mostly because I didn’t want to lose about $50 on slippage and commissions. Argh!
  2. Try to close your positions before you go on vacation! If something happens, your vacation will be ruined, and you’ll probably lose more money than you should have.
0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *