NatGas can get volatile this time of the year, the ROI's are very enticing, however you have to balance this out with your risk profile.
What am I saying?
The models look really good, You have probabilities of 100% expiring OTM and delta's around 0.00 However, as we saw earlier this month, a severe cold snap and this market can go bonkers. Price very well might not eclipse 7.00 but the value of your sold option could skyrocket by many multiples. 57 Days is a lot of time for this market. I have wrote some Feb 8.00 calls 2 weeks ago when I could get $40.00 for them. You might look at a ratio spread to absorb some of the price going against your position.
What would your stop be? 100% i.e. You receive $75.00 in premium (less costs) so your stop will be $150? 2 weeks ago this would have been stopped out. using the 100% stop rule. I'm not saying don't do it. Just know your risk threshold and have a good plan on how you plan to handle increased volatility and upside price movement.
That's my thoughts, I'm eager to hear Ron and others thoughts on this.
Last edited by nomad4x; December 30th, 2013 at 02:08 PM.
The following 5 users say Thank You to nomad4x for this post:
Other findings from my naked NG options vs spreads study.
If you put on the Mar 6 call on 11/26 you would have needed 21.4 times IM!!! on 11/26 to still have it on 12/23. So a higher strike in this event would have been worse not better if you still had it on 12/23.
But it would have been better if you noticed what was happening and got out before things went crazy for the 6. You had a little more time before the 6 got run over compared to the 5.
The 5.00-5.50 spread ROI on 11/26 was 7.8% vs the 5.00-5.25 at 8.3% and it would have needed 3.5 times IM on 11/26 to keep it on 12/23 vs the 3.2 needed for the 5.00-5.25.
The 5.00-5.75 was 7.5% ROI and you would have needed 3.7 times IM.
The 5.00-6.00 was 7.3% ROI and you would have needed 4.2 times IM.
So the 5.00-5.25 spread was the best of the ones I studied. Best ROI and less excess needed to ride it out.
The following 8 users say Thank You to ron99 for this post:
WOW!!! 21.4X IM!!! That could easily get even the largest of accounts in trouble...
That's what I like about this thread, people are so detailed oriented it is incredible! Thanks ron99!
I got to thinking about this and here is a couple off the cuff thoughts...
The factor here is if you play the I'll wait and see game you can easily get a shocker when it goes past your Mental stop. I've had this happen to me once in NatGas, it was 0.01 from me getting out and I played lets see what tomorrow brings, that cost me 0.10.
As a personal rule I usually play ratio spreads (these aren't fool proof and sometimes can make things worse!) when I choose to give myself heartburn. In this case markets that are seasonally bullish or have a tendency to be bullish.
Also when you do choose to sell Naked on extremely high IV, best to fence in profits or BTC when you hit a reasonable target. Experience has taught me leaving an option at 0.01 to ride out has cost me a few $1000 in the past.
Last edited by nomad4x; December 30th, 2013 at 09:03 PM.
Reason: Changed it from a rant to why I posted my off the cuff guesses.
The following 2 users say Thank You to nomad4x for this post: