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Option trading in practice – Week 13

2 Aug 2018,

Dear readers and traders, since last week, we saw a slight loss due to an increase in the gas prices. What makes us happier is the overview of our trading since first May, when we started. Since then, ETF: UNG has grown by about 1%. Since we are trying to be short on gas, an independent observer would expect the value of our portfolio to decline. However, by using the options and dynamic hedging, we have increased the portfolio’s value by 1.5% over given period. Gas (UNG) had the largest drop during this period by 7.2%, while we had 3.45%. So, we are pleased to be able to demonstrate you the added value of using options in trading.

Obr.1: Account Overview

Obr.1: Account Overview


Changes in the portfolio

Last week, we closed all call options on UNG with the 23.50 strike, as the delta was already very low, and such positions are generally best to be closed not increase the tail portfolio risk. As a new position, we sold 8 put options of the underlying UNG with strike 22 and expiration during the last day in August. Logic is simple. Basically, we see the price of natural gas increasing towards winter, and at these higher levels we want to open bigger shorts again. So, in order to make a little profit in this period, we sold put options as covering options to our assigned UNG call options.


Thus, we have 800 UNG shorts with an average short value 22.12, and in addition we have sold 8 put options with strike 22 and a credit bonus of 23 cents per option. So, if the ETF: UNG will stagnate for a whole month (Contango will push the ETF: UNG down, but fundaments due to low reserves can push the gas upward) ending at $ 22 level, we take profit on both sides of the position.


As can be seen from our text above, day by day we are nearing the winter season, when gas volatility increases, and lack of stocks along with abnormally low temperatures during the heating season can cause sharp spikes upward. That is why we are trying to push the construction of bigger short positions towards to prices around 3USD for Bcf. In the meantime, we want to keep only a smaller short and smaller delta.

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