Morning Thoughts – Oldinvestor

Without sharing the exact number, which might be out there for free anyway, production is slightly up from recent lows. I would say it has some room to increase (like 1-2Bcf/d), but that is fairly unknown for me. I just continue to say supply could increase, because it’s not something I want to forget about and then it happen. LNG is still expected to increase drastically soon, and I heard some noise of 0 cancellations for October delivery thus far? I’m not sure the validity of this, but first I’ll just stay focused on what’s to come in September. Prices made a sharp move higher late yesterday; possibly on this positive LNG news, possibly something else. Either way, I continue to hold UNL on the possibility the market just continues to crawl higher.

So I added another BOIL covered put yesterday. This means I shorted 100 shares of BOIL and sold a put. This time I chose a 50 strike put and 3/19/21 expiration. This is 220 days away from when I made the trade. What if we have a 2016 type run in the market next year?

In 2016, natgas prices moved from a low of $1.61 in March to a high if $3.9 in December. This is roughly 142% move up. I don’t want to get into the fundamentals of this move, just look at how far BOIL went up with this move up in NG. In the chart below, I measure from the low to high, and show roughly 131% move up. So if I’m short, this is my main concern, a move that would take my position backward, and by how far? This move isn’t the largest, and it took a while, so contango in NG pricing would hinder BOIL from a strong move higher.

BOIL Daily Chart from March 2016 to June 2017, low to fresh low from Tradingview.com

This would be the largest one time move from a low to a high without a new low in BOIL. Roughly 190% in late 2018. NG went from roughly $2.75 to $4.93 in a very short amount of time. This is roughly 80% up in NG. Since most of the move happened within 1 contract, there would not be any a roll for BOIL. This would allow BOIL to maximize on the move since there is no roll decay. I hadn’t looked at the % until now, 190 is more than 2x of 80, hmmm. There may be a few reasons for this offset in % gain from NG to BOIL. I’m not going to get into that. I do know this is a rather large move and I don’t see any reason to believe there will be a move to $4 natgas without an incredibly cold winter, and production lacking, and LNG booming. Not to mention the uphill contango battle for BOIL. So 190% potential is what I’m targeting for protection against my short position. I’m not so sure this will happen this winter -let’s move on with that in mind.

BOIL Daily chart from September 2018 to end of December 2018 from Tradingview.com

My BOIL trades are now as follows:

BOIL covered puts as of market close 8/13/20

I added the 50 strike with an expiration of March 19, 2021.

P/L and details of BOIL covered puts as of market close 8/12/20

The key element here, to me, is protection. What good is a winning trade if we don’t first consider our chances of survival. I also don’t want to rely on margin for a short position in a 2x leveraged ETF, so I’m going to dedicate enough cash to this position to at least ensure I can move 190% from low to high and survive that. This would be about $65/share (from a low of $22.5), so i would need at least $6500 to cover the short share position, and any boost I get from selling a put moving in my favor is just extra padding. I’ll take this a step further in a moment.

BOIL Daily Chart from June to now (8/12/20) from Tradingview.com

First I want to show all three potentials for my BOIL covered puts and their final protection for my account. I didn’t draw these arrows to the expiration dates, I didn’t think about that until now. I want to show the break-even pricing for each covered put that I’m holding. From $22.5/share to break-even of each covered put is shown below. Let me break this down.

50 put – break-even of $60.50 – 168% increase from low of $22.5

70 put – break-even of $74.71 – 228% increase from low of $22.5

90 put – break-even of $92.04 – 308% increase from low of $22.5

BOIL Covered puts and protection from each from Tradingview.com

Focusing on the 50 strike put, I will profit $1050 if BOIL stays below $50/share by March 19, 2021. But what if BOIL goes to $100 tomorrow? Then I will need extra cash to cover the trade. I wan to assume that BOIL could go to $100/share, because I’m extra paranoid most of the time. I would need $10,000 to cover the trade. The put will make small gains, and offset some of the pain from the short share position going against me, but I want to stay plenty funded for this trade. So if I dedicate $10k to this one trade, that is still a 10.5% gain against the trade in 7 months and a week roughly. That’s almost 1.5% per month profit. I could have sold a 35 put instead of a 50 put and my max gain could have been closer to $1300-$1400 by 3/19/21. That’s about 3% more gain against my $10k investment on the chance that BOIL will be at $35/share vs all I need is $50/share by March.

As for my 70 put and 90 put, these are to allow me to jump off and cover the put at any time I think the market is going to be bearish against BOIL. I can then ride BOIL back down, but I’m not going to preach much about that because this strategy is one that could cause BOIL to become impossible to borrow.

So I’ve share my soul here by sharing my BOIL covered puts. I’m also still holding UNL with 50% of funds in my example account, and it still holding quite well. The market is not dipping now, so I may not get any UNG for a while. I’ll do well enough with what I’m holding, no reason to bite off more than I can chew. It’s EIA report day today. Good Luck

Oldinvestor