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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,479 / 5,734
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Selling Options on Futures?

Old December 14th, 2013, 01:29 AM   #2611 (permalink)
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hi eudamonia,


eudamonia View Post
From a technical standpoint nothing "has" to happen before Christmas.

great.....


eudamonia View Post
it would need to happen before Christmas

hmm



eudamonia View Post

That being said sustained trends don't just go straight up with no pullbacks

'no pullbacks' is a very ambiguous term without stating t/f's. there are numerous examples of strong trending markets going 'straight up' with no pullbacks in certain t/f's.

still not quite understanding the 'sustained' bit of a trend - a trend by definition is sustained, no?

and you've merged FA & TA seamlessly, smthg i struggle to do to my disadvantage, but thats what i like about most of the commodity futures markets - not as blatantly manipulated (to my knowledge) as the rest....fundamentals count.

i am taking heat on these NGs also btw, just trying to absorb the mountain of info & make sense of it.

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Old December 14th, 2013, 01:04 PM   #2612 (permalink)
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I was surprised myself how the front month NG behaves technically. Please note couple of facts:

1. NG is overbought on daily, however far from it on weekly.
2. Current rally is supported by a very strong volume.
3. It broke a very important long-term trendline at about 4.280 this week. Interestingly it happened at almost exact time and level at which the price crossed long-term wave 50.00 ratio.
4. We are sitting right at an EXTREMELY important price level. First of all the Friday closing price is exactly at the long term resistance of 4.400 level. It is almost exactly the level of long-term wave 38.20 ratio.
5. Friday's price action was not convincing at all in respect with any pullback probability. This certainly still IS a strong trend and can continue even at these overbought levels.

The key price level for next week is 4.470, which is the May 2010 / April 2013 trendline. If NG breaks and holds above this level (and stays there the week after), there is not that much resistance above. Sure we have the April/May 2013 top price levels at around 4.670 (not considering the extremes), nevertheless this resistance would not be that strong as it is not supported by almost any volume at that price IMHO. Above these levels the price is vulnerable.
On the other side in case the 4.470 levels are not to be broken, we may see a pullback to the 3.950 "short covering" levels before middle of January.

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Old December 14th, 2013, 02:04 PM   #2613 (permalink)
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rosho01 View Post
hi eudamonia,


great.....


hmm




'no pullbacks' is a very ambiguous term without stating t/f's. there are numerous examples of strong trending markets going 'straight up' with no pullbacks in certain t/f's.

still not quite understanding the 'sustained' bit of a trend - a trend by definition is sustained, no?

and you've merged FA & TA seamlessly, smthg i struggle to do to my disadvantage, but thats what i like about most of the commodity futures markets - not as blatantly manipulated (to my knowledge) as the rest....fundamentals count.

i am taking heat on these NGs also btw, just trying to absorb the mountain of info & make sense of it.

Sorry if that was a bit ambiguous To be clear *anything* can happen in the markets. Some things are just very very improbable.

Typically, long term trends in NG (lasting 8-10 weeks) experience several phases of the trend. They don't move straight up without substantial pullbacks. Two of the longest uptrends in NG between November 1 and Jan 15 were experienced in 2001 and 1997. Both of these trends moved $5 and $1.3 respectively. Volatility adjusted these moves were $2.5 and $1 respectively. During both of these moves retracements of 25% or 50% were experienced during the first two weeks of December (these moves both started at the beginning of November). Currently, we have not experienced any retracements that have held until the daily close. That is the unusual part from a technical perspective.

From a seasonal perspective out of the last 23 years there is not a single bullish or neutral year that has not retraced at least 50% of any up move in November/December combined either during the last 2 weeks of December or during January. So expect that whatever this move does in the next 2-4 weeks there is a very high likelihood of a precipitous decline will follow in the next 2-6 weeks.

The question is can you hold on long enough to live through that retracement? If we continue to go straight up (with no retracement) I think it is highly likely that we won't see above $4.9. However, that doesn't mean the trend is over. I expect that we will see at least a 15-25% retracement in the next week or so (prior to Christmas). At that time the trend is most dangerous. One way that could happen is if we go to $4.8 and then retrace and hold $4.4. From there the trend could launch itself another $1 before finally breathing it's last breath in mid to late January. That is basically what happened in 2001 (volatility adjusted). Keep in mind 2001 is the most bullish year on record and from a fundamental perspective I think there are a number of reasons we won't see that happen.

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Old December 14th, 2013, 02:21 PM   #2614 (permalink)
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Here is a link to the weekly EIA NG report. There is a wealth of information in it.

Natural Gas - U.S. Energy Information Administration (EIA) - U.S. Energy Information Administration (EIA)

It comes out on Thursday afternoon.

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Old December 14th, 2013, 02:52 PM   #2615 (permalink)
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eudamonia View Post
Typically, long term trends in NG (lasting 8-10 weeks) experience several phases of the trend. They don't move straight up without substantial pullbacks. Two of the longest uptrends in NG between November 1 and Jan 15 were experienced in 2001 and 1997. Both of these trends moved $5 and $1.3 respectively. Volatility adjusted these moves were $2.5 and $1 respectively. During both of these moves retracements of 25% or 50% were experienced during the first two weeks of December (these moves both started at the beginning of November).

Nov 2000 was the 2nd coldest Nov out of 112 years. Dec 2000 was the 7th coldest.

Nov & Dec 2000 combined were the coldest in history. 112 years.

NG Inventory the last week of Dec 2000 was 38% below the 5 year average.

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Old December 14th, 2013, 08:26 PM   #2616 (permalink)
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SMCJB View Post
I don't have time to talk in detail now, will try over the weekend, but try googling "Natural Gas March April" and/or "Natural Gas Widowmaker".

As Ron has pointed out, NG supply picture has changed a lot in the last few years... but still probably an interesting research project.

Regarding the March/April Widowmaker trade I show that buying NGJ14 (April) and selling NGH14 (March) on December 16 and closing the position February 10 yields a marginal positive return 18 out of the last 21 years although not without a few drawdowns (worst was $4100 in 2001). From 1996 and prior to Amaranth's implosion in 2006 this spread was quite a bit more valuable (average profit $7415 per year). Since 2006 volatility for this spread has been greatly reduced - for the last 5 years profits were an average of $20 per year with a suggested stop of $380.

One could theoretically construct a decent OTM spread as follows based on the above information:

1) Sell March NG at $7.5 for $0.018 and a delta of 0.02
2) Buy April NG at $6.25 for $0.012 and a delta of 0.02.

$50 net premium after comms. Worst likely drawdown $82 per contract ($4100 at 1 delta multiplied by 0.02 delta).

Thoughts?

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Old December 15th, 2013, 02:28 PM   #2617 (permalink)
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One thing you need to remember is that not only is Natural Gas a real commodity, with real supply and demand, but it's also an essential commodity. If we run out of natural gas, power plants shut down and houses go dark, grandma's heater doesn't switch on and people can die. While this might sound sensationalist, rolling blackouts in the summer have caused people to die on several occasions, and the fear is real for many people. (Although I don't recall us ever actually running out of Gas in the winter). For this reason you can see scarcity pricing occur in Natural Gas (and even more so Electricity) that you will never see in other commodities. This also effects implied volatility and skew in ways you rarely see in other markets as well.

PBS did a documentary back in 2001, where they interviewed several Natural Gas traders including Bo Collins who would later become President of the NYMEX before it was bought by the CME. You can watch the show and see the transcript here. At one point Bo tries to explain scarcity pricing to the reporter by equating it to a man in a desert.
BO COLLINS: If you don't have water to drink, on your first hour of not having water, what will you pay for it?
PAUL SOLMAN: Well, I start to...
BO COLLINS: You don't care that much.
PAUL SOLMAN: Right, I don't care.
BO COLLINS: In... 12 hours later, you're a little thirsty; what's the value of water?
PAUL SOLMAN: It's getting there.
BO COLLINS: Two weeks later, if you're still alive, you'll probably give everything that you have in your bank account for that glass of water.
Interestingly Foster Smith another trader interviewed in the documentary makes the following comments about some 2001 price moves...
FOSTER SMITH: We basically traded from $5.70 up to $6.94 in two days, a pretty large move. We're talking about, you know, a 20 percent move in two days, which... that would be like the Dow going up 2,000 points in two days. That'd be a talkable event.
PAUL SOLMAN: And when the forecast changed just over the weekend...
FOSTER SMITH: Prices came off almost immediately. We opened up at $6.20 yesterday, which was down almost 60 cents, and it went down to $5.70 in about 30 minutes. So we lost everything we'd gained in two days in about 45 minutes.
Back to Natural Gas ... In the US, we use a lot more Natural Gas in the winter than we do in the summer. Since production is relatively balanced year round, we inject massive amounts of natural gas into underground storage April thru October and then remove it December through March. (At it's peak US Natural Gas stoarge represents approximately 15% of annual demand.)

Consumption is very weather dependant but nearly always highest in Januray, followed by December & February. Hence its not surprising that January is the peak of the curve when you look at prices on a forward basis. But if we have a very cold winter, and storage starts running low, it's not January you need to be worried about but March. No matter how cold it gets in January, there will always be enough gas in storage to meet demand. If we were ever to run out of gas in the Winter, it would probably be because of demand in January & February but we would actually run out in March. Hence we have the phenominoum that all the fear factor is pushed into March.

April on the other hand, is the first month of next years injection season. If we run out of gas in March, prices will be higher in April and through out the summer than normal, but not that high, and we will never run out of gas in April. Hence April always has to price itself as the first injection month for the following winter. Hence March prices have the potential to completely detach from April and beyond pricing.

Now consider what happens if we get to March and we have plenty of natural gas. The gas in storage that won't get used now has to price itself to stay in storage for the following winter. Hence March drops to a discount to April! As you can see the dynamics of the March-April spread can vary enormously! If the price dynamics of March seem like they can be a roller coaster - just imagine what the implied volatility can do! To make things even more interesting, CME and ICE both trade and clear, spread options on the March-April spread.

When Bo Collins left his position of NYMEX President he set up a hedge fund called Motherrock. After some early impressive gains the Hedge Fund went down in 2006, rumored to having lost over $200M trading March-April NG spreads and associated option contracts. They were squeezed out by Brian Hunter and Amaranth. In the next 12 months Amaranth went on to lose $6.6 Billion, a lot of which was again lost in March-April spreads (and also Oct-Jan spreads). The big winners were rumored to be Centaurus (aka John Arnold), Citadel and JP Morgan. If you would like to see some interesting implied vols try and get some historical quotes for upside March'06 and March'07 calls.

March-April is the ultimate fear trade, short squeeze trade, and path dependent trade. Every year it trades at a significant premium, and in most years it settles at flat or more often negative (2003 settled $1.74). The question is, can you handle the drawdowns before this happens. Even this year with the much smaller 40c moves, lots of money is rumored to have changed hands.

I know this sounds very sensationalist, and in reality the current increased supply picture means the prices we saw in March-April in the 2000's probably won't materialize again soon. But the facts are Billions have been lost trading this spread over the years.

March April through the Years ($/MMBtu)
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March April through the Years (March % Premium to April)
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Old December 15th, 2013, 02:37 PM   #2618 (permalink)
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If your interested in reading more about Motherrock, Amaranth & Brain Hunter, Centaurus & John Arnold, and the craziness of the Natural Gas Market, Barbara Dreyfuss recently published a book "Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster".

It's very obvious she's not a fan of Hedge Funds in general, especially Hedge Funds run by what she views as reckless cowboys, and it's written from a very skeptical point of view, but if you didn't read all the CFTC reports on Amaranth when they came out, it's an informative read.

Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster @Amazon.

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Old December 16th, 2013, 04:09 PM   #2619 (permalink)
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The 22 largest areas by vol traded (>200k) on the ICE Day Ahead Natural Gas Price Report (after deleting the one that dropped 0.780) averaged a 0.086 drop in prices today.

Henry dropped 0.045

And lower again today...

Trading today 16th for delivery Tomorrow 17th

Algonquin (Boston) $22.60 -$10.30
Transco Z6 (NYC) $6.30 -$0.92
Chicago $4.49 -$0.13
Henry $4.22 -$0.13
Houston $4.205 -$0.105
Rockies $4.17 -$0.19
Socal Border $4.4075 -$0.14
PG&E Citygate (San Fran) $4.50 -$0.15

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Old December 17th, 2013, 09:48 AM   #2620 (permalink)
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As someone said would happen not long ago, OX raised NG margin from SPAN minimum to 10% over today.

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