In a couple of recent articles (here and here) I wrote about natural gas and crude oil. Now seems like an exceptionally good time for an update. Let’s start in this piece with natural gas.
Natural Gas
In the initial article I highlighted the fact that natural gas has showed a tendency to be weak from mid-June into late July (except of course for the one previous time that I actually mentioned this trend…$%^&. But I digress).
Anyway, the example trade I detailed in the article involved:
*Buying UNG Oct 13 put @ $0.92
*Selling UNG Jul 13 put @ $0.27
The “quirk” was that the trade was done in a 3 by 2 ratio (i.e., 3 Oct 13 puts were bought for each 2 Jul 13 puts that were sold). If we assume the trade was entered using a ratio of 30 by 20, then the current status of that position appears in Figures 1 and 2 (click images to enlarge).
Figure 1 – UNG Oct-Jul 13 put spread (3×2 ratio); (Courtesy www.OptionsAnalysis.com)
Figure 2 – UNG Oct-Jul 13 put spread (3×2 ratio); (Courtesy www.OptionsAnalysis.com)
As you can see in Figure 2:
*The price of UNG is about exactly where we would like it to be (i.e., right around $13).
*The trade has an open profit of $420 (or 18.9% on an initial outlay of $2,220).
*The profit could approach $1,000 by July expiration (10 days away) if price stays around $13.
Of course price could move substantially between now and July expiration. This creates two potential “problems”:
1) If price rises back above $13.93 the trade could still end up losing money.
2) If price drops below $13 a share there is the risk of “early exercise” because the short July puts would be “in-the-money.”
So here is the conundrum of a choice in a nutshell:
A) Close the trade and take a 19% profit, but forego the potential to increase that profit significantly 10 day from now, or;
B) Hold the trade and hope price remains relatively unchanged.
C) There are also many ways that this trade could be adjusted. However, remember that our original goal was to exit by July 21, so rolling out of July options into say August options gets away from the original intention of taking advantage of the seasonal tendency for natural gas to show weakness in July (which by the way, it already has).
Summary
There are no “right” or “wrong” choices in deciding what to do with this position (or most any option position for that matter). The key is to identify your priorities and act accordingly. Sometimes it pays to be patient, other times it pay to run like hell.
From my own personal point of view, I would probably look to close this trade now, take the profit and move on. The “objective” of the original trade was to make money from any (not necessarily major) weakness in natural gas during July.
Profit maximized? Not necessarily.
Mission Accomplished? Maybe so.
Jay Kaeppel
