I wanted to share my NG trade experience in case anyone has or was thinking about trading this instrument. I've been long one contract since 1/28/11 when I was assigned a long position via a short put. It's been a nightmare ever since. When the FEB contract was to expire I decided to roll to MAR because I still liked the chart and I was willing to be patient for an upside move, but I was down -$2300 at that time. It cost me .035 ticks to roll contracts, with a 10,000 multiplier that cost me $350 just to maintain a long position. So not wanting to be down -$2650 I sold a covered call for .035 to make my contract roll even.
The chart below shows the breakeven points for entry in to the MAR contract, the purple line in the middle is where I would breakeven from the -$2300 loss, and the top line is where I'm capped at a 4.30 strike covered call. I've been watching this chart daily for two months and growing uncomfortable with the position as it just isn't going anywhere. As of last week it fluctuated from +1000 to -1000 in a few hours. As long as I can roll the contract again at a fair price I'm not too upset and I'll be patient as really I only need one huge day to reap a large profit, and the reason I entered the trade in the first place was I noticed that when it starts to move, it moves pretty quickly. Well take a look at the second screen shot that shows the prices of the current and next two contracts. They are trading tick for tick with each other which is great, but check out the contango. I would have to give up .076 ticks to maintain a long position, I'm not willing to increase my cost average of this position by $760, not when it only buys me another 30 days until faced with this decision again.
So I took this trade off this morning when it hit my covered call strike at 4.30, but I had to pay .074 of time premium to buy back that short call. I potentially gave up $740 in profits. I won't know until Monday when this expires, but because the cost to roll was so high I wasn't willing to watch this position potentially move against me in the next few days. I've been upside down by as much as -$2,800 on this so I'm glad to exit for a profit and add another learning lesson and trading experience to my resume. This trade will be somewhere around $3,000, but factoring in the -$2,300 loss I took when I rolled contracts it's going to be only $700. That's not such a great return considering the risk and time involved. My lesson learned here is that you can't predict or control future contango so not knowing what it will cost to roll contracts must be acknowledged as a risk before you trade this instrument from the long side.
The chart below shows the breakeven points for entry in to the MAR contract, the purple line in the middle is where I would breakeven from the -$2300 loss, and the top line is where I'm capped at a 4.30 strike covered call. I've been watching this chart daily for two months and growing uncomfortable with the position as it just isn't going anywhere. As of last week it fluctuated from +1000 to -1000 in a few hours. As long as I can roll the contract again at a fair price I'm not too upset and I'll be patient as really I only need one huge day to reap a large profit, and the reason I entered the trade in the first place was I noticed that when it starts to move, it moves pretty quickly. Well take a look at the second screen shot that shows the prices of the current and next two contracts. They are trading tick for tick with each other which is great, but check out the contango. I would have to give up .076 ticks to maintain a long position, I'm not willing to increase my cost average of this position by $760, not when it only buys me another 30 days until faced with this decision again.
So I took this trade off this morning when it hit my covered call strike at 4.30, but I had to pay .074 of time premium to buy back that short call. I potentially gave up $740 in profits. I won't know until Monday when this expires, but because the cost to roll was so high I wasn't willing to watch this position potentially move against me in the next few days. I've been upside down by as much as -$2,800 on this so I'm glad to exit for a profit and add another learning lesson and trading experience to my resume. This trade will be somewhere around $3,000, but factoring in the -$2,300 loss I took when I rolled contracts it's going to be only $700. That's not such a great return considering the risk and time involved. My lesson learned here is that you can't predict or control future contango so not knowing what it will cost to roll contracts must be acknowledged as a risk before you trade this instrument from the long side.
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