Natural Gas spread trade

jamesmith

Short October 2013 contract, Long January 2014 contract

Trading on market mechanics, because lots of re-balance at end of year, driving Jan contracts prices up, and pushing Oct contracts down.
Also trades on the believe that natural gas is undervalued for the long term, but overvalued in current term, short a near term and long the longer term.

胡同儿串子

MFTHT

虽然俺不懂。

netbbq

Can you explain why the rebalancing will cause Jan up and Oct down?

jamesmith

NGF4 - NGV3 spread

jamesmith

netbbq 发表于 2012-9-18 02:46 PM
Can you explain why the rebalancing will cause Jan up and Oct down?

Commodity indexes rebalance every year. All the institutional traders have to adjust their holding according to the change.
If natural gas proportion didn't change, but price performance is weak, or if natural gas proportion is increased in the index, then money need to be put in to buy more natural gas contracts. This with the effect of winter spike natural gas price up in Jan.
I think natural gas will play a more important role in the economy, also natural gas in longer term is under valued.

snowrider

IMO ... trading remote months is very risky because of their thin volume ...

jamesmith

snowrider 发表于 2012-9-20 11:49 AM
IMO ... trading remote months is very risky because of their thin volume ...

It's not that bad for natural gas, and it's not a short term play. Look at long term agriculture contracts for real thin open interest :)

NGV3   Open interest: 51725,    Volume: 1659    Bid: 3.618, Ask: 3.62
NGF4   Open interest: 35680,    Volume: 1032    Bid: 4.037, Ask: 4.042

snowrider

jamesmith 发表于 2012-9-20 12:58 PM
It's not that bad for natural gas, and it's not a short term play. Look at long term agriculture c ...

I would suggest to avoid those thin-volume contracts at all costs, especially in the futures market.  I have seen more than many times that disastrous tragedies happened because people trade those thin markets.  It's not only about the whole money in an account ... it could cause one's whole asset gets liquidated in the event that s/he is not able to get out of a losing position because of continuous locking limit ups or limit downs.

jamesmith

snowrider 发表于 2012-9-20 01:11 PM
I would suggest to avoid those thin-volume contracts at all costs, especially in the futures marke ...

daily movement limit in natural gas is $1.5 above or below previous day's closing...and...how many contract do you have to trade for the above volume to be small? Day trading or very short term trading might be a different case...
I understand your concern, and there's always risk involved, but volume is not a huge issue in this specific case. Being a spread trade already reduces the volatility, and being a long term play, I am not looking to get in today and get out tomorrow(or even next week...)

snowrider

jamesmith 发表于 2012-9-20 01:33 PM
daily movement limit in natural gas is $1.5 above or below previous day's closing...and...how many ...

I have seen many times that more than 10 limit ups/downs in a row in JO(OJ), PB, LB, CT, ... in remote contracts.  Imagine the situation that one accidentally gets involved in a losing position and the market locks up with continuous limits.  In the end, all the equity in account is not able to pay the loss - and it become over-loss ... then the brokerage firm will have the account holder deposit more money (not margin call) to cover the negative balance.

Why I say that it is not margin call?  Because it's even worse than margin call!  They issue margin calls when the account equity run is below maintenance margin.  If the account holder ignore that margin call, and if the market still locks up by LIMITs, the brokerage firm is not able to cut the loss ... and then they will get the money of the negative balance back from the account holder.  If the account holder ignore the request, the brokage firm by law can freeze the account holder's bank accounts and other assets.

jamesmith

snowrider 发表于 2012-9-20 01:45 PM
I have seen many times that more than 10 limit ups/downs in a row in JO(OJ), PB, LB, CT, ... in re ...

yes...i will be worried if i am trading orange juice, lumber, cotton, corn, or wheat...

when's the last time natural gas hit limit up or limit down?

snowrider

jamesmith 发表于 2012-9-20 01:53 PM
yes...i will be worried if i am trading orange juice, lumber, cotton, corn, or wheat...

when's ...

That I don't know.  I used to trade CL (and with NG few times only).  IMHO, anything can happen in the futures market.  That's why I do not touch those contracts/months that are of thin volume ... because in the worst case ... at least I can cut the loss and escape.  I don't want to be ... 被人關起門來打而逃不了 ... in order to prevent from getting locked up by limits or even hurt by a huge gap.

jamesmith

snowrider 发表于 2012-9-20 01:45 PM
I have seen many times that more than 10 limit ups/downs in a row in JO(OJ), PB, LB, CT, ... in re ...

for this trade to be fucked by limit, the worst scenario is NGV3 have to hit limit up, and NGF4 have to hit limit down...what are the chance of this happening?  Or NGV3 go limit up but NGF4 hardly moves, or NGF4 go limit down and NGV3 hardly moves, what the the chance of these happening?

Here's the flutuation limit from CME:
Initial Price Fluctuation Limits for All Contract Months. At the commencement of each trading day, there shall be price fluctuation limits in effect for each contract month of this futures contract of $1.50 per MMBtu above or below the previous day's settlement price for such contract month. If a market for any of the first three (3) contract months is bid or offered at the upper or lower price fluctuation limit, as applicable, on Globex it will be considered a Triggering Event which will halt trading for a five (5) minute period in all contract months of the NG futures contract, as well as all contract months in all products cited in the Associated Product Appendix of rule 220.08. Trading in any option related to this contract or in an option contract related to any products cited in the Associated Product Appendix which may be available for trading on either Globex or on the Trading Floor shall additionally be subject to a coordinated trading halt.

source: http://www.cmegroup.com/trading/ ... specifications.html

how many $1.5 limit down can NG have? current price is in single digits.

jamesmith

an update on this spread trade, natural gas went up a lot and shorter term contracts are going up faster than longer term, not good.

NGF14 - NGV13



Let's take a look at this year's NGF13 - NGV12 spread, this spread actually went up.


I still think the following assumption is correct: 1) natural gas is undervalued currently, it will play a bigger role in our economy...2) commodity index will increase NG constituent's size, forcing all the index players hold more NG conracts when index rebalance at year end.
When will this show up on NGF14 - NGV13? I don't know.
If the NGF14 - NGV13 spread makes a new low, I will either reduce size or get out.

silicon_beaver

jamesmith

Got out of the trade :(

jamesmith

Sigh...I am not patient enough...here's the spread now