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.

NG report came out short. It's not only well below average draw for this time of the year, but also shorter than expectation too. With 9 daily red bars, what can I say! In the mean time, I'm trying to sell 2.4 put with 0.1 or above to scale in or offset. I'm attempted to just buy futures outright, but I probably shouldn't do that.

A dead cat bounce

The last time I saw a green ticker on NG was about 8 days ago. It had 7 red candles (daily) in a row shaving close to 20% of its value. Well, that's usually what happens when one tries to catch a falling knife.

I placed an order to sell Feb 2.5 put for 0.153. Yesterday NG dropped to 2.43 and the puts was about 0.13-0.14. Of course, what happened was that it got very close and bounced since. Today, NG reached as high as 2.54, which would have been a nice $1000 to lower my break-even.

I don't see today's uptick as a real bounce. It's a mild profit taking. It might go up a bit more, but usually it'll have another move down, at which it can form a lower low, higher low or double-bottom. The latter twos are the best scenarios for me, but even with those, NG will likely stay at this level very very long time.

I'm hoping it bounces about 0.1 to 0.2 so that I can sell calls to lower my break-even. Otherwise, I'll need a lot of patience.

A chosen one

Have you felt that you have so many things to choose from, but it happens so that you chose something that doesn't work out? I was looking at Corn-Wheat spread, Gold-Platinum spread and Nat gas. It looks like Corn-Wheat would have yielded about $1200 and Gold-Platinum would have yielded about $2600 whereas I'm about -$2200 with Nat gas. I guess we'd all become a good trader in hindsight anyway.

Here's my plan. My break-even on NG is 2.875. NG is currently being traded at 2.655. If it closes around this price at options expiration, I'll roll over and I'll place an order for at or slighly out of the money options for a covered call. To do this I need a bit of bounce. If NG keeps going down like the last 5 days, this can't work.

For example, my roll-over price is at 2.7 and my break even is 2.9 (after the spread between Feb and Mar NG factored in), I'd like to sell 2.8 Calls for 0.2 ($2000), to ultimately make about $1000. Once I have 2.8 calls sold, I'm in a sold position because if it drops again, my break is lowered (2.9-0.2 = 2.7).

On the other hand, if it doesn't give me a chance to sell the call, I'm looking to sell another puts at 2.5 to cost-average. In this case, I can try to sell 2.7 calls for $2000 or so.

There's been lots of talks on NG: hedge fund getting hit, the shortest winter, abundance, new technology to drill etc... I'm simply trying to trade my plan with lots of patience.

I hope for a bounce since the 5-day in a row down day has not been fun.

NG trade update

Looks like NG is being beaten down, making a fresh low by every moment. Two days ago, it was rallying, so I was thinking about getting out with $500+ profits, but I figured that's not why I got in, in the first place, so decided to hold.

With about a little over 2 weeks left, I can't do anything other than just sitting on my hands. Nat gas report comes out every Thursday, but being how warm it has been, I only expect a further down. Technically, volume spikes up when there's a peak, so I thought that's what I saw, but I guess not. It's usually pretty hard when you try to go against the trend.

My break-even is 2.875, so I think I'm in a good position still. I just need to chill and let it play out.

TOS option analysis tool

I don't know if you can see the above image well or not, but the above is a screenshot of ThinkOrSwim option analysis tool. It basically shows how my option is designed to work and where I'm at.

The red line shows the P/L at the expiration. I sold NG Feb 3 put for 0.125 so my break-even is about 2.875 and my max profit is +$1250 taking all the premium. The white line shows the relationship between options and my P/L TODAY. For example, if the options drops to 2.95ish, I'm about b/e. If it drops to 2.875 today (I hope not), then I'm -$522. If the market doesn't move until the expiration, the while line should shift to right everyday.

Now I put an order to buy back this option in case it just shoots up since the profit is limited. What's nice about TOS is it shows what the underlying price will be in regards to options price. In other words, if I place to buy back the 3 put at 0.5, this graph will show that the price of the underlying futures has to go up to 3.1 or something like that.

You can do this in your head, but it's certainly a very nice tool.

2011 Totals

2011 was a pretty quite year in that I didn't start trading until Sept. My portfolio is $25K and I finished with +$1323.03. It's also +5.3%, but I think % is a bit misleading because if, for example, a guy with 1K portfolio comes out, trade forex and makes $1000. Sure, he made 100%, but is it the same as $100K portfolio doubled? I don't think so.

I still have a hard time pulling the trigger. When I didn't know anything, I had no problem getting in, but now I'm very very cautious ended up missing a lot. I still have old bad habits of watching markets tick-by-tick once I get in, which probably doesn't help at all. I hope to make an improvement on this.

I also realized that I didn't do any update on 2009/2010 P/L. At the beginning of 2009, I was down a lot, but made all back + some before I withdrew all to build a house.

Sold Feb NG 3.5 Put

Today I entered Feb NG 3.5 put for 0.125 or $1250.

This winter has been nothing like previous ones. I don't think winter has never been this warm, which probably makes a lot of people think why betting a long on NG? Pricewise, it's already good. If weather starts turning even with a solid cold week, things can turn around quickly. NG is well below the cost of production, so I'm willing to sit on it for a while. $4 or $5 was about half and half, but I like it here.