So far I have 2 covered call positions. I still have 1 more available. I'll probably let this one ride a bit more or I can sell 4.75-5 Call for $2000+.
Wednesday, May 6, 2009
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4 comments:
damn, natty gas is making a crazy run?
Thanks man.
Yeah, Nat gas is finally heading higher. Usually oil is more sensitive and leading, but nat gas seems to follow, yet moves bigger and faster once starting to move.
I still need to write one more call, but not sure what strike / month.
So, what exactly is your average on those three NG contracts after all of the premiums and rollovers. I've been following this trade for a while now and I want to see what type of risk was involved? Very interesting strategy to say the least.
hey boogster,
My avg is about 3.7 based on Jun contract. The risk is simple. If this thing keeps going down, you'll go through a significant drawdown. A few days ago, NG was traded at 3.2. I think my drawdown was at that point about -$18K.
You also have to worry about margins. RJO (my futures broker) has $6K margin per contract on NG. I was long 3 lots futures out right and 1 put options, so margin itself was about 24K.
At that moment, I had to have at least 42K in my account. Of course you want to have more money in your account for a wiggle room and you don't know how low this is going to go.
It's highly unlikely that NG's price goes back to 1970s at 2ish, but possible. If I'm holding 4 lots and NG goes to 2, I'm -$63Kish at that point. (And I was prepared for that).
Good news is NG can't go to zero, so you can keep adding lowering your avg and a contract like NG is so volatile that you can take advantage of options. I was unfortunate that I didn't get filled on call options previously on each bounce (literally missed by a tick), but lessons learned.
This kind of strategy takes months and years. Who knows this bounce can be just a dead-cat bounce. That's why I sold calls, so if I have to roll-over I don't get affected by a carry-cost.
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