NG Natural Gas Trade Experience

I wanted to share my NG trade experience in case anyone has or was thinking about trading this instrument. I've been long one contract since 1/28/11 when I was assigned a long position via a short put. It's been a nightmare ever since. When the FEB contract was to expire I decided to roll to MAR because I still liked the chart and I was willing to be patient for an upside move, but I was down -$2300 at that time. It cost me .035 ticks to roll contracts, with a 10,000 multiplier that cost me $350 just to maintain a long position. So not wanting to be down -$2650 I sold a covered call for .035 to make my contract roll even.

The chart below shows the breakeven points for entry in to the MAR contract, the purple line in the middle is where I would breakeven from the -$2300 loss, and the top line is where I'm capped at a 4.30 strike covered call. I've been watching this chart daily for two months and growing uncomfortable with the position as it just isn't going anywhere. As of last week it fluctuated from +1000 to -1000 in a few hours. As long as I can roll the contract again at a fair price I'm not too upset and I'll be patient as really I only need one huge day to reap a large profit, and the reason I entered the trade in the first place was I noticed that when it starts to move, it moves pretty quickly. Well take a look at the second screen shot that shows the prices of the current and next two contracts. They are trading tick for tick with each other which is great, but check out the contango. I would have to give up .076 ticks to maintain a long position, I'm not willing to increase my cost average of this position by $760, not when it only buys me another 30 days until faced with this decision again.

So I took this trade off this morning when it hit my covered call strike at 4.30, but I had to pay .074 of time premium to buy back that short call. I potentially gave up $740 in profits. I won't know until Monday when this expires, but because the cost to roll was so high I wasn't willing to watch this position potentially move against me in the next few days. I've been upside down by as much as -$2,800 on this so I'm glad to exit for a profit and add another learning lesson and trading experience to my resume. This trade will be somewhere around $3,000, but factoring in the -$2,300 loss I took when I rolled contracts it's going to be only $700. That's not such a great return considering the risk and time involved. My lesson learned here is that you can't predict or control future contango so not knowing what it will cost to roll contracts must be acknowledged as a risk before you trade this instrument from the long side.

When Technical Analysis Steals Your Lunch Money

Update to my NG trade. I am so grateful I wussed out and closed my short put in hopes of putting it back on again on a pullback. Looks like that worked out wonderfully. Although TA is a great tool, do not get comfortable and rely on it. I don't want to say I made a mistake on this trade because clearly that would be a retrospective comment, but I do want to point out that TA just like anything else, is only an input tool and not a system in of itself. If it were we would all just write a program to trade accordingly, life and trading isn't that easy. The truth is that basic TA has been working wonderfully for me on a few different asset classes the last two months over numerous trades. This time it didn't work but the ratio of hits vs misses is strongly in my favor so I'm going to stick with it as an input and deal with the minor frustration when it doesn't work.

NG Put sale

On Monday 12/27/10 I sold the JAN4 NG 4.00 strike put for .153, max gain = $1530. We've been going straight up since then and with 27 days still remaining until expiration I'm looking to possibly close this out early for 50% of the maximum gain. I would look to re-enter this same trade or possibly get long the underlying if we pull back towards 4.00.

Update 12/30/10: I had a day order in to close at .076 and it was triggered pre-pit trading hours this morning. So I picked up 50% of the possible gain in 3 days = $770. There are still 27 days left until expiration so I will be looking to re-enter this if given an opportunity. 

More NG charts

So here are my charts from yesterday and why I was looking to get long NG. We have a series of higher lows after a long 8-month sell off. Considering it is winter, this asset can't go to zero, and I'm comfortable with the margin requirement for taking out a new low, I favored getting long here. But I didn't like the overhead resistance line. Sometime in the next two days one of these trends has to break. So I chose the short put rather than just getting long.

NG Update: WOW!!

What a wild ride. There must have been a large short position out there, or maybe somebody willing to take delivery was bottom feeding and snatching up at this price. Look at the volume and price action in the last 30 minutes of pit trading. I was happy to take a break even and 30 minutes later there was an $800 profit. It could just have easily moved that fast against me so I'm glad to break even here. I did end up selling the FEB 4.000 put option for .153 right as this move occurred potential good timing there. The FEB chart saw the same up move as the JAN so maybe that blows my earlier theory. I haven't been trading this asset class long enough to have an informed opinion.

Now check out this classic technical bounce in the chart below. I had the blue line for the FEB contract drawn before today's action. We bounced exactly on it. I was looking to sell a put in to this move and I did. That was a more conservative approach but a simple long at that support line would have yielded a $1000 profit in a little over an hour. The max gain on my put sale is .153 x $10 = $1530 but I'll have to wait 30 days!!

NG close out

I closed this covered call out for a scratch trade. After commissions it's going to be + $2. The option expires in 20 minutes and the underlying long has to be closed out or rolled by tomorrow at 11:30am PST so I just took the break even here to be done with it. A half hour ago I was facing a -$400 loss so I'll take the break even. I am going to keep an eye on the FEB contract for an entry point near 4.000. I might even sell the 4.000 put.

New Trade: NG

NG closed near 4.00 on Friday and over the weekend I was looking at the charts and thought it was a good entry point for a long position as it looks like we are seeing higher highs and higher lows. Also, it looks like there is a little buying as we are coming off of near over sold conditions. I used a covered call because it expires in just 7 days and I liked the total return on this trade, assuming it stays above 4.00. I ended up getting lucky with timing and if we open tomorrow any higher I might just take this trade off. I can capture more than 50% of the possible gain in one trading day, we'll see. I  might also consider rolling this to February if we close under 4.00 as right now the contango is only a few points.