Yikes. I am short some March 6.9 and 7.4 calls. I sold the 6.9s @ .016 and the 7.4s @ .009. I'm underwater quite a bit.

I know that Ron recommended against selling March calls, although that was a few days after I sold them. At the time I asked why I shouldn't sell the "hell out of them". I did sell a fair amount, but not as many as I was going to.

In addition to Ron's sage advice about dealing with positions going against us, Harvard16 has shared his experiences when he held positions last April.

I'm saying all this to get input from everyone as to how far I let this go before doing something and to let everyone ride along and learn with me.

The BidAsk on the 6.9 is currently .026/.035 and on the 7.4 it is .011/.030. What would you do?

mu2pilot

mu2pilot, I'm still sitting tight with all my short options on both side, and a lot more comfortable than a few weeks back when the market was shooting above 4.5 and vol was going mental. The NG market has been really strange lately with the market dipping during the worst of the cold only to rally later, I was very comfortable going into yesterdays inventory numbers as it was common knowledge there was going to be a huge number so little room for a surprise.

Norm4X had this good advise which rings true on pg 274, ' Never exit a position immediately after an event that created a spike in volatility. I've lost more money adjusting or closing OTM trades on NatGas on Thursdays. If I would have waited until after lunch I could have adjusted or exited for a much better cost.'

With options usually better to let the dust settle and the wide spread retrace to normality before considering exiting or adjusting.

Hi - You're getting hurt by a very sharp rise in implied volatility. The $6.90 and $7.40 calls are about 80% and 90% IV, respectively. That's the bad news. The good news is you're not taking much heat due to a rise in the underlying.

Assuming you're not 'over-positioned' (whatever that means for your circumstances), I'd hang on a bit. IV and the underlying can certainly rise if people keep milking the cold wxr story, but time decay will soon accelerate and mean reversion (in IV) is also on your side.

Today's NG drop may just be longs taking profit before a long weekend.

The fundamentals are very bullish. 15% less inventory than 5 year average. And extreme below normal temps predicted for next 2 weeks.

Below zero several nights next week.

As someone who is short calls, any drop, for whatever reason, is welcome relief

How important is the inventory number, as long as we don't run out by the end of March (which is typically the end of withdrawal season)? I see estimate of something like 1.2-1.5 trillion left at end of March, lowest in years, but not enough to run out. Maybe it is the fear of running out, or even coming close?

The U.S. herd is the smallest since 1952. The on feed numbers are the second lowest on record, and the commercial beef output in the U.S. is the lowest since 1994. The USDA says the herd is at a 61-year low as of January 2013. Beef production dropped to a 20-year low. Talk about extremely bullish!

So how did all of this happen?

It appears it started with the 2011 drought in Texas. Cattle were liquidated because pastures burned up. Then, to add insult to injury, the Midwest had the driest spell since the 1930s in 2012. To further put upside pressure on cattle prices, global consumption is increasing (even though U.S. demand is down) and is the highest since 2008 because of standard of living improvements in various third-world countries making beef more affordable. Consequently, year to year exports are up 4.4%. Now Western Australia is experiencing very hot weather – 110 to 115 degrees. Western Australia is the beef producing sector of Australia. That stresses those herds. Does it ever end?