/NGZ5 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 10/09/2015 /NGZ5
2.73 2 short 2.3 P 0.022 -0.11 46 $900 $7.42 pending pending
2 short 3.3 C 0.023 0.12 $7.42
2 11/04/2015 /NGZ5
2.293 2 long to close 2.3 P 0.130 -0.48 20 -$1700 $7.42 pending pending
3 11/11/2015 /NGZ5
2.284 2 long to close 2.3 P 0.001 -0.01 13 $7.42 closed -$1720

Trade reasoning

The supply-demand equation in natural gas has been really balanced over the summer, with no sharp moves in either direction. The price of NG started trending lower towards the end of summer, as supply is strong.

All else being equal, the autumn months are slow for NG. It’s not hot enough, nor cold enough to dig into supplies.

Winter is approaching though, and as we know, NG reacts with harsh volatility to weather patterns during the winter, if supplies are strained. Right now, supplies are strong. Surpluses now stand at 155 Bcf versus the 5-year average, and 443 Bcf greater than at this time last year. This year’s El Nino is a strong one, so meteorologists are expecting a mild winter. If this hold up, it should stay relatively calm for NG as well.

My latest NG trade will expire at the end of November, which is the time when supplies start getting drawn, due to heating demand in the US. I think it is still safe to open a short strangle till then. We’ll see what follows, it’ll depend on El Nino forecasts for me.

My deltas are just above .10, and are pretty far out in case NG starts moving.




The upper/lower leg on the above chart looks close to the lower leg, but looking at the actual NGZ5 contract, it’s actually delta neutral right now.


The +1 deferred month contract is about $0.2 away from the front month. Implied volatility isn’t anything to write home about, but as you can see, it hasn’t made any major moves for a while, so no point in waiting for it to shoot up. Time is money!

Now it’s time to take a step back, and let Theta do his job.

Update #1 – 10/28/2015

To put it bluntly, NG prices have crashed in the last few days. I was on a trip to Las Vegas from Friday morning to Monday night, so I didn’t have a chance to adjust this position.

Supply is strong, and since there is no bad weather in sight, demand is deemed weak. As a consequence, prices have gone down 20% in just a few days.

My NGZ5 short put is ITM, very bad news…

I’ve been thinking about what to do, and trying to carry out some intraday NG trades as well.

The EIA is reporting on natural gas inventories tomorrow morning as well. Here are the estimates:

For the Oct. 23 week, the median estimate is for an addition of 68 bcf. Estimates range from an addition of 56 bcf to an addition of 87 bcf.

The estimate for Oct. 23 compares to 88 bcf added to storage for the same week last year and the 73-bcf, five-year average addition for that week.

If the storage estimate is correct, inventories as of Oct. 23 totaled 3.9 trillion cubic feet, 12% above levels from a year ago and 4.3% above the five-year average for the same week.

My options:

  1. Wait it out, and pray for cold weather. Damn El Nino! The last time we had an El Nino of similar magnitude was in 2009. NG prices dropped 20%, just like they did now, but they rose back up starting the middle of November.
    But if I wait, I could potentially suffer a catastrophic loss of $10,000+, if prices retreat further
  2. Close my position at a $2500 loss. Ouch.
  3. Adjust the put leg, but since it’s expensive to buy back, I would have to write 8 contracts of NGZ5 at $1.9, to break even. That’s 17% lower from today’s price, so that might be enough, but it will really increase my margin requirements.

Update #2 – 11/04/2015

I’ve made the hard decision to close the put side of this trade with a monster loss.

Price rebounded about 2% today before official trading hours, so I thought I would take this opportunity. I don’t know where NG will go from here, since:

  • it is at a 11 year low, which might offer support
  • IV has decreased slightly
  • but fundamentals are still bearish
  • expiry is creeping up, just 3 weeks away, and the 2 week weather forecast shows much higher than average temperatures.

The thing is that just like the NGX5 trade, this whole crash of NG prices caught me off guard, while I was on vacation. I remember getting the alert from TOS on my phone on Friday after landing, while waiting at the car rental shuttle at the airport. If I would have been working, in front of my PC, things would have turned out differently.

Ever since, I’ve been eyeballing the 1 minute intraday chart of NG, analyzing things non stop, and it’s just too much stress.

The HUGE lesson learned here is that if you go on vacation, close everything. If something happens, you might suffer a monster loss. And something WILL happen, as you can see here. And I’ve only been trading strangles for 4 months.

Adding the NGX5 and this NGZ5 trade together, I accrued a loss of around $2500. I can basically add that to my Las Vegas costs 🙂

But in all seriousness, it sucks to see the result of months of trading go down the drain, with just this one loss. I feel this could definitely have been avoided, if I would have adjusted the trade in time.

I might keep an eye on NG still, and if it drops back, I might enter this expiration again. More and more people are bullish on NG at these prices, despite the lack of fundamentals. But some are saying, that on a bump in prices, hedgers will sell.

I think if there was some solid fundamental bullish news, a short covering rally would start, raising prices 10%+. The thing is, it’s so warm, and with El Nino getting stronger, winter may get cancelled.

Update #3 – After expiration

The NGZ5 contract expired yesterday at around $2.2. Looking at the original trade setup, this had a -0.07 delta, so a 7% chance of happening, with a 14% chance of touch. The 7% is not quite the 2 standard deviation level, but almost.

Natural gas reserves are at an all time high now, and pumping is still strong. Bad weather is not coming yet. By the way, this affects all the retailers as well, since people are not buying winter clothing yet.

I’m thinking of putting on a longer term trade on /NG, like may at these levels.

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