NG new order

NG is about -7% today. I expect this to test the low. Accordingly, I placed an order to sell 2.5 put.

NG update

I probably shouldn't even look at what NG is doing everyday, considering it's a position trade, but I treat it like a day trading, which is completely wrong. I don't know why and I didn't have this kind of issue last time. After seeing $6K+ down, maybe I lost confidence in me.

On Friday, I placed an order to sell at 2.852 figured it might gap up after the weekend (based on the Friday's close). Markets also like to test previous high / low to see if it'll attract buyers and sellers and run some stops. I think the previous swing high was 2.830s so I figured, it'll spike higher to 2.850s, which give me a fill.

It did gap up nicely, but only to 2.844. A lot of things were going through my mind.

-I just risked $6K and only take $300ish profit at 2.844? That doesn't make sense.

-Based on my analysis, we're still on a downtrend, so I'm sure this wants to head down and test the bottom (or higher high) at some point.

-Should I set a stop at about break-even?

-Should I just get out?

At the end, I just decided to leave it alone. Instead of going to 2.855, Nat gas started heading down and today closed at 2.710 LOD about $1350 off today's high, so I'm -$1K again.

I think we're at a critical level. It looks like a bull flag on daily, but it also can dive from here pretty hard. I was hoping for a strong close, but we closed very weak. NG has been very volatile, so buying an put doesn't seem like a good idea. I don't sell a call at least until I have two contracts.

Anyway, I move my target up a bit because I figured if it breaks 2.844, it'll probably go 2.9 or so. If you have any advice on being patient, please let me know.

NG roll over

I rolled over my NG holding:

Sold 1 Feb NG at 2.563

Bought 1 Mar NG at 2.60

(-$3.5*2 + -$3.5 = -$10.5 futures execution and options assignment commissions.)

The Feb sell will offset the 3 put. The spread at the time of execution was 0.037, so my new break-even based on Mar contract is 2.815 (after commissions).

I'll put an order to sell a call and a put option soon. To sell a call, I need a bit of bounce and to sell a put, I need a further drop. Until then, looks like I'm going to be in the wait mode again.

I'm wondering if history repeats itself between Feb and June like boogster says.

NG report

The following is NG report:

The U.S. Energy Information Administration report showed total domestic gas inventories fell last week by 192 billion cubic feet to 3.098 trillion cubic feet. Traders and analysts polled by Reuters had expected a 168-bcf decline.

So, the inventory dropped more than expected, a normal guy would think NG should rally. 24bcf is a lot! But it's not, actually we're well of its high. Outlook still looks warmer than normal. Still well above 5 year average inventory. Heck, on the weekend, I saw lots of birds migrating to north in the middle of January!

Anyway, I stopped rationalize markets because it just doesn't work for me. What works is a plan and an ability to execute the plan.

Plan on NG

Today, Feb NG options expire. I have two puts: 3 and 2.4. The 2.4 puts will be likely to expire worthless. The 3 puts is well in the money. My break-even is about 2.775. I've been scratching my head quite a bit because I expected NG to stay below 2.4 so that my break-even would be 2.58.

Instead, I'm close to be break-even. Actually overnight, it went as high as 2.8. The dilemma is this.

Say, I want to get out at break even now, so I'd place an order to exit my 3 puts. As you know, if options go well in the money, the spread of bid and ask get widen. The spread of futures' options are a lot wider than stocks'. By the time I get filled, I'll be a victim of market maker, who tend to do this on purpose on expiration day even more.

So, the next option is to short Feb futures outright. Sounds great. The twist is there's nat gas inventory report coming out today. For whatever reason, if it shoots above 3, I need to exit the short because at that time, 3 puts will get worthless and I don't want to hold on to a short on news day. What if it goes above and below 3 back and forth. I should keep buying and selling like day traders, which can't be quite costly. This is quite unlikely and as of this writing, because NG is -0.040, so this option is long gone.

I thought about buying puts too to protect from the downside move, but believe it or not, even if today is options expiration day, there's still a lot of premium on so far out-of-money options. Sure, NG became volatile, but I'm not paying for $500 to offset 0.050 out of money.

What do I do? When things go against you a lot and come back, you're so attempted to get out at break-even. Yes, the murphy's law says, if I get out at break-even, as soon as you get out, it'll go in your favor. If you don't get out, it'll worse than before. Nonetheless, I'm not going to do anything until news come out.

If it's above 2.775, I might offset by selling futures and place an order to sell puts to fresh start at a lower break-even. If it's below, I'll hold and I'll roll over to March contract. I'll place an order to sell calls at the same time. Strike and price need to be determined.

NG bounced a lot in the last 3 days, so it may be due for a pull back (if not another leg down). Something interesting is Feb options has twice more puts than calls. Wouldn't it be a good money to get a lot of inflated puts expire worthless from institutions' standpoint?

Short squeeze

A classic short squeeze. We had lots of initiated (new) short last week, which increased the open interest on Feb contract on Nat gas. As we're approaching to the contract expiration this week, people tightened their stops.

Overnight on Sunday the contract was down a lot not to mention gapped down scaring people away, which is when institutions start taking profits, which in turn makes it drift higher and higher. It then triggered buy stops (exit shorts), which makes NG shoots to +0.25ish in a matter of mins. (Isn't it always very easy to explain after the the fact??)

I say this is a short squeeze because this makes the open interest go down, but also it came off the high shortly after quickly dying every min. Another thing to look at is the spread between contracts.

What's more important is that longer term contracts have gained than near term ones. News shows that the biggest nat gas driller decided to cut down production immediately and the last week's baker hughes report reads the rig count went down again.

What do producers do when price go down and they don't make money? They cut supplies. Supply goes down and price goes higher. And that's what I'm here for. Granted, it'll take a very long time and I don't think we'll see $10+ gas, but certainly higher than where we're now. Markets are very very efficient about what's likely happen in the future.

Today, NG shot up with the continuation of the yesterday's move, but quickly faded. It'll keep going down to see if there's any buyer. Hopefully a higher low or a double bottom. I can't do anything until the Feb Options expire on Thursday. I hope we have a thrust move to upside, so that I can utilize more options. I'll talk more about this later.

Sold Feb NG 2.4 Put

While I was writing my previous blog, NG came down, so I sold Feb 2.4 put for 0.105 (or $1050 - $3 commissions). I was initially thinking about selling 2.5 put, but price was dropping too fast, so I waited. A bit better, but I don't see any sign of a bottom yet. I don't want to be out of bullets.