Calamari88 

@ron99, Hi Ron, in addition to the margin excess you set aside, do you also have a premium multiple you'll use as an upper limit signaling you to exit a position at a loss? Or do you exit strictly based on your margin excess parameter and pretty much disregard the premium?

I don't look at premium multiples.

Most of the time I found that exiting at a multiple caused me to take a loss even though I wasn't on margin call and miss out on what became a profitable trade. But it takes nerves of steel to sit and do nothing when there was a large paper loss. But most of the time I was rewarded when things reversed.

Not a strategy for everyone. But it's what I use.

Of course if fundamentals change, I exit.

ron99 

I don't look at premium multiples. Most of the time I found that exiting at a multiple caused me to take a loss even though I wasn't on margin call and miss out on what became a profitable trade. But it takes nerves of steel to sit and do nothing when there was a large paper loss. But most of the time I was rewarded when things reversed. Not a strategy for everyone. But it's what I use. Of course if fundamentals change, I exit.

It takes relatively long for fundamentals to change. How do you determine if it is really changed to against your position?

sinpeople 

It takes relatively long for fundamentals to change. How do you determine if it is really changed to against your position?

Actually fundamentals can change quickly. Weather can change to hotter or colder than normal. Too wet or too dry. A hurricane can appear. A refinery can shutdown. A pipeline can blow up. A disease can appear. A war can start. A government can shutdown. A president can do something dumb. Etc.

Perfect article for this thread

Quoting 

Concentration: the fastest way to build wealth and the fastest way to destroy it. To have any chance at “getting rich quick,” you need to hold a concentrated portfolio. But chance is the key word in that sentence, for you may instead get poor quick.

https://pensionpartners.com/why-you-diversify/

Actually these are all short term events which may or may not have a long term impact on the demand and supply to determine the price movement in the long run.

ron99 

Actually fundamentals can change quickly. Weather can change to hotter or colder than normal. Too wet or too dry. A hurricane can appear. A refinery can shutdown. A pipeline can blow up. A disease can appear. A war can start. A government can shutdown. A president can do something dumb. Etc.

This is a chart showing front month ATM volatility for NG. (I think. I took it from twitter)



The takeaway from this chart is that volatility increases almost every winter. So selling NG options ahead of winter is a bad idea because even if prices don't move against you the increase in volatility and thus the increase in premium could cause losses.

Conversely, selling call options at/near peak when threat of US cold weather drops is normally a good strategy. But notice the spike in volatility in late winter the last 2 years. Have to watch out for them.

ron99 

This is a chart showing front month ATM volatility for NG. (I think. I took it from twitter) The takeaway from this chart is that volatility increases almost every winter. So selling NG options ahead of winter is a bad idea because even if prices don't move against you the increase in volatility and thus the increase in premium could cause losses. Conversely, selling call options at/near peak when threat of US cold weather drops is normally a good strategy. But notice the spike in volatility in late winter the last 2 years. Have to watch out for them.

Excellent find! I can attest to this. Twice I took losses based on that volatility increase-

On 11/21/16 I sold Mar 2017 NG 7.000 calls for $40 and within 2 weeks they blew up to $300. The market didn't even move that much but I guess increased volatility just gets built into the premiums during that time.

On 1/22/14 I sold Mar 2014 NG 8.500 calls for $20 with only 34DTE. Because it was had so little time before expiration and the strike was 100% OTM I thought it would be safe. Not so. 2 days later it increased to $210 and ultimately hit a peak of $1710.

In both these instances I exited early enough that the losses weren't too bad. However, it was annoying to watch them both expire worthless!

Looking back your suggestion to sell them at the peak volatility would have been the way to go. I got in too early.

Until now I didn't know this volatility increase in the winter was a regular occurrence. Thanks for the heads up on this Ron! Do you consult a volatility chart for all markets before putting on trade?

Calamari88 

Do you consult a volatility chart for all markets before putting on trade?

I haven't been but will start.

Thanks for giving examples of what can happen. It drives home the point.

ron99 

This is a chart showing front month ATM volatility for NG. (I think. I took it from twitter) The takeaway from this chart is that volatility increases almost every winter. So selling NG options ahead of winter is a bad idea because even if prices don't move against you the increase in volatility and thus the increase in premium could cause losses. Conversely, selling call options at/near peak when threat of US cold weather drops is normally a good strategy. But notice the spike in volatility in late winter the last 2 years. Have to watch out for them.

Problem might be that volatility for the April and May options does not rise in the same way as for the March contract. Current IV for March is 46.33, for April 30.70 (source: MRCI). This divergence might rise as we approach winter.

I would not like to sell the March options, but April or May would be interesting. If IV is high enough.

Best regards, Myrrdin

myrrdin 

Problem might be that volatility for the April and May options does not rise in the same way as for the March contract. Current IV for March is 46.33, for April 30.70 (source: MRCI). This divergence might rise as we approach winter. I would not like to sell the March options, but April or May would be interesting. If IV is high enough. Best regards, Myrrdin

I think this helps explain why the April and May strikes have such lower premium than the same ones in March. It seems like the volatility is already building up in March.