We exited a long vertical call spread in natural gas on Tuesday due to April expiration of the options and the underlying futures. This indeed is a reminder that options are indeed a decaying asset that one needs to be aware of at all times.
Nevertheless, we are seeing renewed interest with the new active month. At the time of this post, natural gas for May delivery (NGK7) is trading at $3.233/mmbtu.
source: Saxo Bank
Gains are extending today after last night’s weekly inventory by the EIA (US Energy Information Administration) reported inventories for the week March 17-24 fell by 2.1%. In addition, Baker Hughes also reported that its natural gas rig count at 155, down two for the week.
The decrease in inventory and operations could give the energy product further gains. The positive short-term momentum seems to be supported also by a rising RSI. The current reading on the oscillator is at 61.2.
A quick check with QuikStrike tools (https://www.tradingfloor.com/tools/options-open-interest-analytics) also show a somewhat bullish sentiment from the put/call ratio of 0.76. Increased interest in $3.50/ mmbtu.
Management and risk description
For the trade, we will use a 5-point wide vertical call spread. The downside in a vertical is limited to the premium paid.
Underlying: Natural Gas May 17 (NGK7)
Status: opening trade
Trade: Buy + 1 Vertical NGK7 1/10000 May 17 3.20/3.25 @.025
Long 3.20 at .130
Short 3.25 at .105
Net Debit $.025 (x10000 multiplier or $250)
Maximum loss: debit paid or $250
Maximum gain: difference of two strike price minus debit paid or $250
calculations @expiraiton, not including any commission fees
Entry: Today, buy to open + 1, sell to open – 1
Stop: no stop
Target: NGK7 to trade above 3.25 near expiration.
Time horizon: 20 days.