US NatGas – Shorting spreads with less risk.
NGH9NGJ9 spreads offered a 24-hour trade last week, now back to good entry levels. It is at 1.40 again.
Good one-day trade.
— Raf Abreu (@thetailchaser) November 15, 2018
From Twitter’s Brynne Kelly:
#Natgas: The March $4.25 calls are roughly $0.88, the Mar/Apr spread is $1.40…..just sayin….you do the math….
— Brynne Kelly (@BrynneKKelly) November 19, 2018
So one can hedge the NGH9NGJ9 short by buying ATM NGH9 calls for 88c. Which works as somewhat shorting the spread with much lower risk at 1.40-0.88 = 0.52.
1/ Long NGH19 4.25 Calls @ 0.88c
2/ Short NGH19
3/ Long NGJ19.
A way to look at it:
1/ Short H19 + long 4.25 calls = one is long NGH19 vol, paying 88c for it.
2/ Is long April gas from low levels relative to March.
Another way to look at it:
1/ You’re short H9/J9 from (1.40 – 0.88) = 0.52 but with much, much, much lower risk.
One can do [short 2 units of the Spread] versus [long 1 unit of NGH19 calls] for reduced risk, but still more upside, 0.52 + 0.88/2 = 0.96c
You lose money in a situation where March natgas explodes even more than April contract, but from already historically extremes. I’ve never seen this in any gas chart I looked at.
Size accordingly (extreme loss scenario = how much you can really afford to lose in such trades), because a market that gets nuts can get even more nuts.