From a far away perspective (in Austria) it looks like the cold blast in the US is coming to an end. I am surprized that the NGH futures did not move further and are far away from taking out the highs of Q4 2017.
I liquidated my long NGH C4.0 with a nice profit of 100 %.
Assuming higher temperatures in the near future, I began today to enter small positions in the NGN-NGJ bear spread and the RBN-HON spread.
Both spreads are supported by seasonals at this time of the year, according to MRCI data. Entry dates suggested by MRCI differ.
As always I am very interested in questions or comments, especially from traders observing the weather in the US more closely than I do.
Best regards, Myrrdin
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Greetings from NY, It has been extremely chili here in NY. Friday and Sat we will be getting hit with an Artic cold blast coming in from Canada. Highs are expected to be zero and from what the're reporting parts of NY will be getting hit with minus 25 degree windshield factor. Then things seem to be warming up on Sunday. JP
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It's surprisingly warm in Salt Lake area, the ski resort probably is going out of business if this keeps continue in the future. Been in Idaho and Utah for quite a while and this year is probably the warmest winter time ever.
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I too am a little surprised how quickly NG gave up the fear of winter. I've had a small outright bullish position on myself (very rare for me to have something like this on) and while I started buying in a little too early, continually adding and reducing the position at opportune times enabled me to lower the basis to a level where this most recent run up enabled me to exit for a profit but the trade was awful considering risk/reward or return/drawdown (~0.25).
Two years US Natural Gas stocks were at all time high's. While this is obviously bearish, one should also consider that the amount of storage we have has been increasing consistently. Since last winter stocks had started correcting, were no longer at all time high's but were still above 5 year averages. The last 3 months have seen stocks further erode so that we now stood just below 5 year averages. This last weeks 206 BCF withdrawal was the largest for this week of the year in at least 10 years, and we now sit firmly below the 5 year stock level. I think this clearly points to a shift in th supply-demand balance over the last 2 years.
It's cold out there, but it's only really cold in the Northeast. While prices in Chicago started out very strong, with $9 gas for 1/3, they dropped to $6.25 for the balance of the week, $3.75 for this weekend and $3.20 for balance of the month. Even in the Northeast prices are expected to drop considerably. TETCO-M3 (NJ) peaked at $95 for Friday, $20 for this weekend but back down to $4.15 for Balance of the month. Out west gas is still under $3! What this is telling you is that the markets don't think it's staying cold, in fact they think the balance of the month is going to be warm and the forecasts seem to support that.
Jan 6th...
and Jan 9th ...
and Jan 8-14
At this time of the year it's all about weather. If the forcast turns cold prices will rally, if it stays warm we'll probably sell off more. Remember that any Natural Gas still in storage at the end of March, basically becomes the first gas in storage for next year. As such if we have a surplus of gas March will probably end up pricing at a discount to April.
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Sharing my trade here.. i legged into the March/April spread before i went on vacation so early Dec.. i got it at an average of 0.49
I did not take too much heat because i think my timing was just lucky.
After that i realized this could go much lower or even negative.. (there is a thread where SMCJB posted a chart of all the years and there were many years the spike never really came)
Anyway i exited half at 1.05 and the rest at 1.51. It went up to 2.08 or close to that.. sorry on vacation not tracking and documenting every day.
So yes went with the fundamentals and turned out ok.. but need to be careful on the entry in the future or use to trade it more actively.. rather than hoping for the winter spike in the future..
Note: I was also short put options and this was my method of averaging down since margin on additional naked puts was mounting quite significantly as prices were close or even past my short put price
Both trades are based on seasonal considerations. The lows for the year seem to be in. I was surprized that the cold blast in December did not move the prices of HO and NG more seriously.
Best regards, Myrrdin
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It is interesting to note that the NGN-NGJ spread never had its Best Equity Amount between 10th of February and 1st of March in the most recent 15 years. As in 2018 the best equity amount did not occur before the 11th of February, I intend to stay in the trade for some more time.
Best regards, Myrrdin
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I traded the GOU18-GOZ18 spread recently, opening on 12-Jul and closing on 13-Aug, capturing a 7 point move. The seasonailty
chart at this time of the year looks good.
The spread had a low margin of around $260/contract, giving a very healthy rate of return.
Apologies for the late reply. No, I'm not a scalper, but more a "few days to a few months" holder of trades. Personally,
I like trades that have a life-span of about a month.
NG
Given the recent spike, I see that some of the NG calendar spreads are looking interesting. This week, I opened the
NGZ8-NGK9 spread, which should come down in value over the next month from a technical and seasonal point of view. Will need to keep a close eye on fundamentals of course.
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Yes you will. Watch the long term weather forecasts! NG is a different animal than it was 10-15 years ago when March-April would go to some really crazy prices, but this is still a very asymmetrical trade.
I have a rule of closing when the potential loss hits a certain level - but in this case, I have ignored that rule. So am still holding. It's a very small position so I am not losing any sleep over it.
In fact, the whole energy sector has been very bullish, be it GC, CL, HO, or RB, and this is resulting in paper losses on some other trades that I hold. I am surprised that there has not been more discussion on this forum, cos I'm sure there are opportunities being thrown up by the recent bullishness.
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Good luck to you. NG has a had a decent move the last few weeks. I'm not sure what to think from here. Still need to see how the fundamentals pan out. Looks like we are going into winter with the least amount of storage in over a decade (by quite a lot, 9-10%!) - of course that is partially offset by production being the highest it's ever been.
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ICE trades today
EIA 10/11 +93 ... which would be 10-15 BCF higher than usual
EIA 10/18 +82 ... which would be 10 BCF higher than usual
EIA 10/25 +61 ... which would be normal
End of Season 11/08 traded 3250 which is higher than I've seen some models but would still be 200 below 2008 which is the 12 year low.
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I bought a few UNG Puts today and now I think I am in a bit of a difficulty... LOL
Thats why I got interested in this thread. LOL
Small position though, just trying new stuff.
@myrrdin @SMCJB would you guys know why the forward curve goes to backwardation from February?
I know it gets closer to spring season BUT with Natural Gas being as expensive as it is to store, I am surprised those prices are lower than current...
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Nov-Mar US consumes more than it produces
Apr-Oct US produces more than it consumes
At the end of March, if we don't have enough gas in storage, prices (for March) are dictated by scarcity economics. On the other hand if we do have enough in storage, the gas left in storage becomes the first injection month for the following year.
This is why leading up to, and often in the Winter, March trades at a premium to April. As we progress through Winter though and it becomes more and more obvious that we will have enough gas, that premium decays and march often finishes below April.
March/April is known as the widowmaker. Amaranth & Motherrock are two well publicized hedge fund blow ups caused by March/April.
I haven't updated this chart in a year, but I think you will get the picture. (And yes those are $3 spread prices, not outright prices!)
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In the energies I currently hold the following positions:
RBG-HOG
This trade is favored by the seasonal charts. I was stopped out of this trade with a loss some time ago, and re-entered yesterday. This is one of my most profitable trades over the years, although it is difficult to find the best time to enter.
RBJ-RBF, HOH-HOZ
Both trades are suggested by MRCI. Especially the chart for the HO spread follows the seasonal chart nicely since April 2018.
NGH-NGF
The spread reached an extreme level some days ago, and is now on its was back to normal. I was lucky to buy it on 4th of October with a very close stop below the most recent low. High risk trade - thus small size. I will exit immediately if the spread is beginning to move against me.
(CL Calls)
I bought back various CL call spreads last week with a nice profit.
Best regards, Myrrdin
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RBG-HOG - opened on 01-Oct, and showing a sizeable loss currently. I may add to this position.
HOH-HOZ - opened on 31-Aug, and showing a profit. This should come alive in the next month if the seasonal
pattern is followed.
In addition to the above:
I have the NGZ-NGK position (mentioned previously), which is showing a big loss, but I want to hold on, maybe as a
test of endurance and learning opportunity.
I have the CLG-CLF, which was opened in Jul. Have closed half position for good profit, and will let the rest run a
bit more.
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Bumping a thread here with a question regarding exchange traded spreads you guys might be able to answer.
In some exchange traded spreads the liquidity is good but the underlying contracts are very illiquid. So the P&L is showing big swings even if the exchange traded spread hasn't even moved.
But is this considered to be actual unrealized drawdown? Could there be problem with margin and such?
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There are lots of spreads where this is the case. For example even right now, 2 hours before RTH, the CLX20/CLZ20 spread is just two ticks wide. CLX20 as an outright though is 99c wide - and hasn't traded - and may not trade all day - while CLZ20 is 3c wide. Most trading front ends, and risk systems are unable to show PnL 'on a spread basis' and as such will mark-to-market your spreads as individual outright positions. This can create phantom/unreal PnL scenarios when you have situations like this with one or both legs of the spread are illiquid as outrights. Your end of day PnL should be correct though.
No. it's an aberation caused by weaknesses in the exchange matching engine's. You will need to make sure that your trading system doesn't view this as real though and stop you out based upon outright leg PnLs and not the actual spread PnL.
Re: Margin Requirements - the exchange and most brokers use the SPAN system to calculate margin. SPAN gives you a significant discount for spreads versus outrights and this shouldn't be a problem.
Re: Available/Excess Margin - Excess margin is simply (Money in your account) - (Margin requirement of open positions) +/- (PnL of open positions). The problem is, intra-day as you have highlighted (PnL of open positions) can be extremely inaccurate for some spread positions. So yes you could/will end up in the situation that your intra-day margin calculation is completely wrong, and if your broker is bad enough, could lead to unwanted and unnecessary liquidations.
Just curious what are you trading where this is a potential problem?
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I have seen this in several different products in grains and energy so it wasn't a specific product. It's not seen in the exchange traded spread DOM i think, but only when i look at open P&L on the trading account or underlying positions.
I'm not having a problem with this right now, but i'll check with the broker and such to make sure. I asked mostly as a precaution and for "future reference". Since it would feel quite tough to make something from spread trading if you would need a huge account to trade small positions because of those "phantom/unreal PnL scenarios".
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It really depends what 'months' or products you are talking about. In my example I picked the CL X20/Z20 spread for a reason. In Crude Oil the matching engine calculates implied prices for the first 12 months, and for the first 36 months in the M and Z cycle only. So today, early Nov'18, the matching engine is calculating implied prices for CLZ8, CLF9, G9 ... V9, CLX9, CLZ9, CLM0, CLZ0 and CLM1. So if your spread is between any of those 16 contracts the predicament we are talking about will NOT apply. So you could be trading something complicated like a CLM0/Z0/M1 butterfly and your P&L should always be reasonably accurate. In my example though CL X0 is not being implied by the matching engine and does not trade as an outright very often, CL Z0 is implied though, and trades regularly as an outright, hence creating inaccurate PnL for the spread.
If your a smaller trader, who doesn't have a big account, my advice (at least with crude) would be to stick to the liquid spreads, that fall in the implication ranges. If you have an strong opinion on the CLZ9-CLZ0 spread go for it, but I wouldn't be trading the CLQ0-CLU0 spread for many reasons not limited to the PnL issue that you identified.
Also as already mentioned a lot of this will come down to your broker. I regularly have 'implied losses' in my account greater than the excess margin available, but my broker knows this is phantom, and created by the situations discussed. But I've also been with my broker for over 9 years.
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According to seasonal charts, the RB-HO spread should be interesting at this time of the year.
I was stopped out of this trade twice recently with a loss.
The current cold weather made the spread cheaper, but the extremely cold weather will end some day. In recent days it looks to me as if the spread would find a bottom.
The spread RBK-HOK currently notes about -26 to -27 . Whenever it was below -10 since the eighties it moved up to above +10 later. This corresponds to a profit of more than 20 or more than 8,400 USD.
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Head spinning.
Crude down $20 (~27%) in last 5 weeks. Obviously RB and HO both refined from CL.
Crude Stocks are now building quite fast after falling for 18 months. Gasoline stocks are unseasonably high, while HO stocks are unseasonably low.
NG up $1.25 (~45%) in last 6 weeks and competes with HO as a heating fuel.
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Not an energy expert by any means, but I dug into that huge HO/RB spread, and a news article said that there was a major refiner in the northeast that had to shutdown due to a fire. HO inventories may not be enough to serve the market until either the refinery comes back up, or they can get barges up the coast. RB inventories should be fine, hence the violent action in the spread.
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If I interpret this CME Performance Bond Requirement (aka margin) changes correctly it is saying that they are increasing the volatility scan ranges for most oil options effective after the close of business on November 15, 2018. ie Margin requirements for most Options will go up.
November and December 2018 I was buying the dip and I was bullish and quite sure that 58 on the brent will hold, then sure that 50 should hold and I used at a time for a short period up to 3 long futures in addition to my 3 naked put options to be successful.
The situation has changed or at least I keep in mind my Elliott waves (can be a wave 3 or can be a wave C with 40 -45 as objectives) and I am ready to intervene but I will be cautious because I do not have strong conviction this time. I have only a short spread put option at 58 - 55 so my potential losses in July are limited, but still...
The fundamental is weak as global growth is slowing and US production is high. There are rumors that some countries can still import some Iranian oil up to a certain and unspecified quantity. The WTI COT does not talk to me too much (no recent extreme, nothing remarkable). Of course the MM are decreasing their bullish positions.
So far I prefer trading the Brent than WTI but it is almost the same analysis anyway.
Any opinion, input?
Concerning NG it may be the time/will be soon the time to explore a slightly bullish option view for the end of the year.
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I started buying some relatively cheap NGH C3 options.
Winter is far away, and temperatures in December / January / February are unknown today. But there were many years when NGH moved above 3.0 some time in winter.
In case NG price moves further down even lower strike prices might become interesting.
I intend to sell half of the options with a profit of 100 % to have a free trade for the remaining options.
Best regard,s Myrrdin
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I've just seen it this morning and was thinking about selling the spread on a technical basis only. I couldn't figure out the fundamental reasons why this has risen so much recently - maybe the bearish CL fundamentals (eg. Russia removing an export duty on crude etc etc) apply more to the Z contract than the earlier ones??
I will do it on a small allocation.
(A year ago, I did a similar technical trade, and that worked out pretty well.
I've just noticed that the backwardation in CL has created a large divergence between CLU18 and CLZ18, currently almost 4. (In fact, other spreads eg CLU18-CLU19 etc etc show a similarly unusually large divergence.)
This spread has been between 0.5 …
)
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I don't have an opinion on the subject (V-Z) but as I showed in this chart last week, CL definitely seems to be pricing in a multi year supply-demand change which I would suggest is driven by the macro opinion of a global slowdown. I say this as things like the Eurodollar curve have a same shape. So maybe the V-Z increase is more a function of Z coming under more pressure from the curve shape change, rather than a strong fundamental reason?
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I closed this today at 0.46 (opened on 16-Aug for 0.75) for a profit of 0.29.
The spread may well fall further, but I have some other CL trades on at this time, so just wanted to take the profit on this one and run.
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So... the Saudi oil production has been disrupted with drone strikes. CL has risen around 8-10% this morning.
To avoid panic, Trump says there's plenty of oil.
As traders, what do we do?
- wait for the situation to clarify itself further, before taking action?
- go short and take advantage of the high volatilty and sell calls or call-spreads?
- go long and ride the uncertainty?
- find a calendar spread trade which takes advantage of the near month rising more than the back ones (eg CLZ-CLG)?
(These tend to be low margin, so give a good ROI, if successful.)
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It's just a massive bet on how much damaged was done. It seems apparent that shutting down the entire complex (~6M bbl/day) was precautionary. So the question is how quickly does this come back. If they bring 90% of it back online by the end of the week, then the effect on world supply is minimal. In on the other hand they only bring 50% back and it takes months or even years to get the other 50% back the effect on world supply is significant.
Last night it was chaos, and there were some crazy price moves in individual spreads. As a heavy Butterfly trader some interesting anomalies were
FGH20 butterfly settled 0c, traded as high as 150c, now trading 2c - I didn't see this happen so no idea whether it was just one lot
HJK20 butterfly settled 3c, traded as high as 15c, now trading 6c - This was not 1 lot. You could easily sell HJK in mid teens.
UVX20 butterfly settled 4c, traded as high as 15c, now trading 5c - This was not 1 lot. You could easily sell UVX in mid teens.
Interestingly other butterflys like GHJ20, MNQ20, NQU20, QUV20 barely moved.
Right now (CLV 6043) they seem to be coming after Z/J the most (271c, +141c which is +35 per spread) versus V-Z (73c +47c just 23.5c/spread) and say J/M (110c, +43c just 21.5c/spread). So in Condor speak the V-Z-J-M condor is -51c on the day!
One thing that has now changed, is that since this happened once, it could happen again. As such I think there will be a new fear premium built into pricing. Question is, how much?
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According to Jim Cramer (it was my lunchtime and I was casually watching CNBC ok) the damage was to a part of the refinery that is responsible for a complex gas extraction process. So not a quick or easy fix.
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Here's a chart of today's price move. You can see clearly what I meant by the Z9-J0 spread. I'm not sure what all this means but you can see from the Butterfly chart how even though CLV9 went up the most, the structure of the curve is discounting the impact until we get to Z9 or even F0 delivery.
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I liquidated some of the RB-HO spreads (very) profitably (May contract), and added new positions recently (July contract).
It looks like spring is approaching, and there will not be very cold temperatures in February / March 2020. Airplane fuel - as far as I know - is hedged via heatiing oil futures, and corona virus will take care that there are less flights in the near future.
Driving season will come - as in every year.
Current price level again invites to enter this trade.
Best regards, Myrrdin
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There is actually a Jet Fuel market (yes it's called Jet Fuel!) which trades Over-The-Counter rather than on Exchange. But Jet Fuel, like Kerosene, Diesel and Heating Oil are all considered middle-distillates and refineries can adjust the relative yield of each a lot easier than they can switch from say Heating Oil to Gasoline. So if Jet demand is reduced @myrrdin is right that should pressure the other distillate markets - eg Heating Oil.
"Russell Hardy, chief executive of oil trading group Vitol, said in late February that he expected at least a 2.2 million-barrel per day drop in oil demand in the first quarter largely due to the coronavirus."
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Unfortunately, I did not re-enter the RB-HO spread aroud -50 - would have been a nice profit ...
My only position in the energies is some NGU futures. I expect a reduction of the production of natural gas in the US, as oil production is reduced. And - perhaps - we will see more exports to China and a hot summer. In my opinion, the medium term downside risk is limited.
Best regards, Myrrdin
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My thoughts were inline with yours. I was talking to a friend in the last few days that works on a big energy trading desk and they thought very differently. Said while all the financial trades love it, all the physical traders hate it. Worried that demand destruction will exceed supply reductions and that a large amount of LNG exports no longer make financial sense.
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LNG exports are 5 bcfd and should mostly be take-or-pay, so I wonder how much realistically we’d lose from that.
Associated is 15-20 bcfd - have you seen any forecasts for how much that decreases at current rig count levels? If some regions are still flaring I think that may decrease less than people think as the producers try and squeeze out all $$.
Power burns should be down too so it seems like fundamentals are pulling NG in multiple directions. It may still just stay a weather play when all is said and done.
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Meant to reply to this.
I don't know what you classify as an institutional sales desk? If you mean a bank, no, who cares what they think. If the Goldman Sales guy was telling me what Aron was doing and not what he though I might be interested. If you mean big hedge fund, maybe. (Never understand what people mean when they refer to institutional clients in the energy industry. The big energy traders back in the day, were much bigger than any institution!
Not trying to be retro trader here - I really have no idea where gas is going - but LNG exports definitely seem to be going south! Plus everybody now things production is coming back again. Who the hell knows!
Free $100, gotta bet on red or black? Gas goes lower not higher.
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Back in Feb and March the CTAs and large speculators were massively short gas. It was a large enough position asymmetry to make me bullish for a short-covering rally, but that trade kinda fizzled out and seems to be done now. Per the COT data, Managed Money covered a 300,000+ lot short position in March and April, but only barely moved prices back up to the low 2 handles - briefly - because demand destruction apparently left plenty of net supply available to fill their covering bid. Now positions are back to flat, and so am I.
If anyone has a strong opinion one way or another I'd love to hear it.
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It usually refers to who they’re selling to and not who they work for. Typically institutional sales roles are cross-asset functions b/c of what you’ve described in terms of institutional trading size (e.g. have to cover for markets since their client’s trades are smaller) as well as the fact that their clients often put on complex multi-commodity positions. Because of this, they’re often less in-the-know than their desk-specific sales counterparts that cover market and region specific consumer/producer clients.
An interesting seasonal trade at this time of the year is the RB-HO.
MRCI recommends the March contracts, which were profitable between middle of December and Christmas in each of the most recent 15 years. I decided to enter the May contracts to be able to take profits from an improving situation around COVID19. The 15 year pattern for these contracts is moving upwards constantly until expiry.
In my account, these spreads are a hedge for my speculative NGH long position, which I bought recently. Cold snap will help NG, whereas it will be a problem for RB-HO.
The spreads could be bought just above 0 in recent days, I intend to begin profit taking around 10 c.
Best regards, Myrrdin
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