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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,171 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old December 12th, 2013, 06:40 PM   #2571 (permalink)
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Margin for NG did not increase at CME in April. It increased on 5/8 from 2310 to 2585. Not much. Basically after all of the rise and some of the fall.

Futures were down Thu 5/2 by 30 cents. The evening of the 3rd CME sent out notice to raise margin effective Wednesday the 8th.

I don't remember what OX did during that time.


Last edited by ron99; December 12th, 2013 at 06:47 PM.
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Old December 12th, 2013, 06:59 PM   #2572 (permalink)
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ron99 View Post
So does the price turn around quickly with the warmer weather coming this weekend?

Looking at the ICE settlement file balance of the month prices are lower in most locations but not a lot.

For example at Henry Hub, gas traded today for tomorrow (13th) averaged $4.40 while gas for the balance of the month (14th-31st) settled $4.3625. NOTE that there is a timing mismatch here. Next day gas trades in the morning while BalMo settles at the end of the day similar to futures. Since the market rallied this afternoon that BalMo price could be affected by the rally, while the price for the 13th wasn't.

Looking at other locations... 13th vs BalMo
Algonquin(Boston) $26.38 vs $19.48
Chicago(Citygate) $4.64 vs $4.705
Houston(HSC) $4.36 vs $4.36
PG&E Citygate(San Fran) $4.76 vs $4.725

ron99 View Post
Do futures lead physical prices or physicals lead futures?

The chicken and egg question.

In reality I think they are highly linked. Obviously physical prices are driven by supply and demand. If there is more physical gas available than we need then that gas has to price itself so that it is either cheap enough to flow somewhere else in the country and/or go into storage for use at a later time. If we have less physical available than we need then the price will go up until somebody no longer needs/can afford it or until more gas comes from other locations. Unfortunately in the short squeeze situation pipes are usually full and gas can't be diverted from elsewhere, so the price goes to a point where demand is curtailed. This is partly what is happening on Algonquin (think Boston). Note that New England does have the ability to import LNG, but international LNG prices correlate to crude oil prices and not US NG prices. Hence the huge premium for Algonquin.

If physical gas is in short supply and prices are rising, it's not surprising that futures prices will also rise. If we use more gas this month than we expect, there will less gas available in storage for the following months, so the chance of us having enough is reduced, hence prices rise. Hence physical & financial are linked.

Also consider the example where financial momentum causes futures prices to rally. If physical prices stay the same, the economics of storage will improve. So people will buy more physical gas to put into storage, and sell futures against it as a hedge. This will both cause physical prices to go up, and bring new selling into the futures. Hence physical & financial are linked.

Unlike many commodities the US natural gas supply is extremely dependent upon storage and hence fundamentals have a much larger impact than in many markets. I know many people that believe NG is much easier to trade long term than say crude because of this.

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Old December 12th, 2013, 07:49 PM   #2573 (permalink)
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SMCJB, Do I have this correct?

Henry prices come out in am?

Henry
Trade Date___Begin Date__End Date___Ave___Fut__Fut Date
Jan 11, 2013 Jan 12, 2013 Jan 14, 2013 3.1843 3.327 1/11/13
Jan 14, 2013 Jan 15, 2013 Jan 15, 2013 3.3845 3.373 1/14/13

On 1/10 NG futures settled at 3.193.
Henry prices came out the am of 1/11 at 3.1843 AVE.
Futures that day settled at 3.327.
Monday am Henry went up to 3.3845 and futures settled that day at 3.373.

I see the same pattern through the year. See attached spreadsheet.

Looks like futures lead Henry higher.

Attached Files
Register to download File Type: xlsx Henry NG Futures.xlsx (18.4 KB, 14 views)
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Old December 12th, 2013, 10:49 PM   #2576 (permalink)
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I went back on MRCI seasonals this morning looking at the extend of previous NG rallies for the Feb contract in the Nov to Dec period low to highs. Apologies I had to eye ball the levels, as the charts are not that details and came out with the following on the significant years:

Feb'10 Low 4.55 High 6.1 Diff 1.55 (+34%)
Feb'08 Low 7 High 8.5 Diff 1.5 (+21%)
Feb'06 Low 11.30 High 16.75 Diff 5.45 (+48%)
Feb'04 Low 4.90 High 7.4 Diff 2.50 (+51%)
Feb'03 Low 3.90 High 5.5 Diff 1.60 (+41%)
Feb'01 Low 4.30 High 10 Diff 5.7 (+133%)
Feb'97 Low 2.30 High 4 Diff 1.7 (+74%)
Feb'96 Low 1.90 High 3.1 Diff 1.2 (+63%)

FEB'14 Low 3.5 Current High 4.4 Diff 0.9 (26%)

Moral of the story is I think many including myself have got used to low gas prices and thinking the current move may be looking overdone, but looking back, this beast can move very far , very fast with no regard to established resistance levels.

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Old December 12th, 2013, 11:54 PM   #2577 (permalink)
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Harvard16 View Post
I went back on MRCI seasonals this morning looking at the extend of previous NG rallies for the Feb contract in the Nov to Dec period low to highs. Apologies I had to eye ball the levels, as the charts are not that details and came out with the following on the significant years:

Feb'10 Low 4.55 High 6.1 Diff 1.55 (+34%)
Feb'08 Low 7 High 8.5 Diff 1.5 (+21%)
Feb'06 Low 11.30 High 16.75 Diff 5.45 (+48%)
Feb'04 Low 4.90 High 7.4 Diff 2.50 (+51%)
Feb'03 Low 3.90 High 5.5 Diff 1.60 (+41%)
Feb'01 Low 4.30 High 10 Diff 5.7 (+133%)
Feb'97 Low 2.30 High 4 Diff 1.7 (+74%)
Feb'96 Low 1.90 High 3.1 Diff 1.2 (+63%)

FEB'14 Low 3.5 Current High 4.4 Diff 0.9 (26%)

Moral of the story is I think many including myself have got used to low gas prices and thinking the current move may be looking overdone, but looking back, this beast can move very far , very fast with no regard to established resistance levels.

Anything before 2009 is not applicable because horizontal drilling and fracking has permanently changed the supply picture in NG while NG to coal switching has changed the demand picture.

The current movement is the 2nd largest in the last 7 years.

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Old December 13th, 2013, 10:37 AM   #2578 (permalink)
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Based on a review of the seasonals for NG, we typically see a top in the market late December - usually next week.

From a technical standpoint the market has rallied through 3 important resistance areas and just busted stops yesterday above 4.4 (on the front month).

In the past 5 years the market has been bearish to neutral and we've seen a mild rise in December. This year the rise started early (in November) against the seasonal tendency which tends to indicate a stronger move.

That being said, on a volatility adjusted basis a $1 move such as what we've seen is about right as far as the duration of these moves. Even 2006 (the 2nd strongest bull market of the last 23) which was a very different NG world than the one today only saw a $4.5 rise during this time. Before you panic about a $4.5 move - keep in mind that a single day could move over $1 back then. Our largest move this year was $0.30 (a down day back in the end of April) thus translating to $1.5.

Therefore, I believe it is highly likely that at worst we may see $4.9 this year. That may seem very scary. However, it would need to happen before Christmas. It would require a straight rise in the NG market of $0.5 this week which would actually be unprecedented (even 2006 required pullbacks to achieve it's high in December). Therefore, it is very highly unlikely.

For some of you though you might be in a bit deep having taken on a big position (as I did). If you really feel uncomfortable but haven't bailed on your position yet there is a very simple hedge that will allow you some sleep. Assuming you have at least 15-20 calls on (worth about $5k or more) simply buy 1 Jan NG 4.35c at the money. You pay about $1500 for this insurance and worst case you spent $1.5k for nothing but peace of mind. Worst case scenario you exit both sides of your position for about breakeven at expiry (December 26).

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Old December 13th, 2013, 11:18 AM   #2579 (permalink)
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Thanks Eudamonia, I like your take on things, the question I have at the moment is how the market is going to react to the expected 230+ draw in next weeks storage report and how much of that is already priced into the market at this time, that's a significantly large draw.

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Old December 13th, 2013, 11:37 AM   #2580 (permalink)
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Weather is the main driver of NG futures movement in Dec.

Here's the last 8 years of the Jan NG contract.

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The one big jump in Dec was 2009 for the Jan 2010 contract.

This shows that Dec 2009 was 3.37 degrees colder than normal.

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NOTE I just noticed that Nov 2009 was way warmer than normal. +3.83 degrees.


Last edited by ron99; December 13th, 2013 at 12:15 PM.
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