Post Date of this article: Saturday/ October 28, 2017:
Natural Gas posted 1-1/2 year lows back in mid-October (2017) basis the DEC17 contract. Just yesterday, the JAN18 contract fell sharply. Here is the 15-year average price trend basis the JAN contract:
Studying the Nymex JAN18 one-year price chart (not shown here), seems to confirm that prices now and for another two or three months may indeed follow along the 15-year seasonal trend. Of course, this presents a trading opportunity to sell JAN18 Natural Gas (NGF8) CALL options. Yesterday’s new issue of our newsletter, The Time Farming Training Bulletin, detailed a new position I placed by selling some of those CALLs far above the present JAN18 contract price.
The strike I sold is estimated to have a 97.45% chance of expiring worthless (Out-of-The-Money) when it expires on December 26, 2017, about 59 days away. If this trades goes to plan, it should be a nice holiday present.
One of the questions I’m frequently asked is: Where do you get the probability percentage of an option expiring worthless?
Answer: When I am using my ThinkOrSwim account, in the option matrix set up – I add a column named “Prob. OTM” and that percentage is automatically computed/displayed for all the strikes of that class. By the way, if you are new to option lingo, a CLASS is a group of options that all expire on the same date. For example: <JAN18 is the group (the class) for options of Natural Gas that all expire on December 26, 2017.
If you use ThinkOrSwim and can’t figure out how to customized the columns in your option matrix display, call them to get help. You will enjoy taking full advantage of this feature. One thing you should be acutely aware of is that when this feature says your option has a 97.45% Prob. OTM, that is a pure mathematical computation (based on Black-Scholes or a similar formula.) The formula collects data on the option: time until expiration, volatility of the underlying, the price, and the distance a strike is from the money (the price at which the underlying contract is trading). Be advised that this calculation does not figure in any fundamental information (like supply-demand, inventory, seasonal trends, and other factors.)
I use the “Prob. OTM” as a primary factor when I choose STRIKES to trade; but I always study the market’s fundamentals and seasonal price tendencies. If all these things are in harmony (as they are right now with JAN18 Natural Gas), then I feel I have ‘good math’ AND the fundamentals on my side.
In examining the current fundamentals of the NG market, I found:
- Inventories are -1.2% below the five-year average (“normal”)
- Expected production is also normal
- The seasonal lull of demand between summer and winter is typical this year.
In all the talk about “seasonal trends”, you should always keep in mind, trading only on that factor can be risky – because in every commodity, there are years that do not follow this trend (called “counter-seasonal” patterns.) One should definitely be aware of the seasonal trends, but then be sure to check everything else to confirm that a reliable seasonal price pattern is there.
Mark Twain said, “There lies, damned lies, and statistics.” In a 15-year average chart, the counter-seasonals are mathematically swamped and you usually won’t see them in the chart.
The comedian George Carlin said, “Think about all the people you know who are average, then consider that 50% of everybody are below that!”
Natural Gas Fact:
Natural gas–a colorless, odorless, gaseous hydrocarbon–may be stored in a number of different ways. It is most commonly held in inventory underground under pressure in three types of facilities. These underground facilities are depleted reservoirs in oil and/or natural gas fields, aquifers, and salt cavern formations. Natural gas is also stored in liquid or gaseous form in above–ground tanks.
This info is from a free Government website: EIA.gov that has an incredible amount of information about most all energy products.