The Heller Angle – July 16th, 2020

Hopefully by now I have setup a framework to help those reading this how I look for trades. First and foremost I put on my risk manager hat and have a plan in place in case my fundamental and technical view is wrong. Every trade so far has been a winner, but these are the kinds of trades that should win 95% of the time. One needs to be prepared for when a trade does go wrong. I bring up risk management because after my post a week ago there was a good discussion on twitter that I have linked below. Thank you to those who contributed on the thread.

I probably sound like a broken record at this point but due to the unknowns with Covid-19, I am trading with credit spreads only so that I know my maximum risk when I make the trade. I will someday in the future trade in ratios and have uncovered options from time to time. Again putting on my risk hat, it is important to have a plan ahead of time to manage uncovered options.

One of the contributors (Jacob) discussed how he had bought call spreads and as the trade worked he turned that long call spread into a ratio of 1 long call vs 1.25 short calls. What he did there in my view was to take off a little bit of the delta exposure he had by selling calls but still was delta long. If trade had pushed up closer, at some point his deltas would have flipped negative. There are plenty of ways to manage risk at that point, does the trader exit the entire position? Does the trader look to buy another call above it turning it back into a balanced position (something like a call butterfly)? Does he buy the futures to cover the upside risk (which then opens up more downside risk) because their fundamental view has changed and doesn’t mind the downside risk. I agreed with his view and thought it was unlikely NG was going to run up very far. A few days later as the price of NG price chopped around and a few days passed by, theta decay occurred and he was able to buy back the extra calls sold for a profit. His ratio moved back to 1:1 and had some profits to cover a loss if NG moved lower. This is very good trading in my view.

Another topic discussed is the risk/reward of doing tiny spreads like the ones I have currently been doing. I am far out of the money (OTM) but my risk/reward loss ratio is high if NG moves significantly lower. Risking potentially ~0.14 to make 0.01 might not make sense to everyone. If I don’t feel strongly on how NG will move in the next 2 months but feel comfortable that NG will stay above 1.50, I can setup these trades and profit from that.

One way I could setup a trade with a better risk reward would be closer, such as 1 straddle away vs 1.5 straddles away, and also longer time periods like 90 days vs usually 45 days or less. A trade like that might make 25-33% of the width of the spread. You will see me do those types of trades, just not right now with all the uncertainty in the fundamentals on both the supply and demand side.

So let me now get back to fundamentals. I have not discussed fundamentals much, mostly because I don’t think they have changed very much these past few weeks. I do however feel that something has fundamentally changed on the demand side that makes me slightly less cautious.

As we all know, a few months ago the entire US basically did a hard shut down and then started opening back up. With cases rising again, I started watching hotspot areas Arizona, Texas, and Florida to see how they would react. The big change I have noticed is that government officials are now trying to do more targeted closings. For example, in Arizona, the state has required indoor restaurant seating to 50% occupancy vs shutting all seating down and only allowing takeout. When we started opening back up, 50% was only recommended and not required (no idea how many followed the recommendations). While this is just one example, there are countless others that show a targeted response versus complete shutdown. Essentially demand will still be reduced, but not as signifcant as in in April / May. Of course, some lock downs are the same as before, gyms are shut down in Arizona but others like malls and retail are open but require a mask. Overall, I do not see hard shutdowns happening, which makes me more comfortable with demand and adding more exposure back with credit put spreads.

Since I have not been writing here for very long, I want to be clear that I still have smaller than normal positioning size and will continue to do so. This spring and summer I have been trading at approximately 50% of size relative to 2019 and plan to maintain that as a maximum. Currently, I’m way below that as I wanted to see how these hotspots handled their phased re-openings.

As a good risk manager, continue to stay vigilant regarding the risk. Experts think winter is going to be worse for Covid-19. Some thought there would be a lull this summer so we cannot be 100% sure. If Covid-19 does get much worse this winter, places could go back to back to very restrictive shelter in place orders versus stay at home recommendations / requests.

This post is quite long already so I will try to post tomorrow or sometime this weekend additional thoughts on LNG (bullish) and supply (less bullish than I have been) but overall net slightly more bullish than I have been previously on a short term basis.

The current NG price for Sept is 1.778. 1.80 straddle prices are 0.30 and 1.75 straddles prices are 0.31. 1.5x straddle prices away is approximately 0.45 with 41 days until option expiration. 1.30×1.15 put spread can be sold for 0.010 at the ask. I have orders in for 0.011 and 0.012.

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The Heller Angle – July 7th, 2020

NG is up significantly from the bottom, so much so in fact that it touched the 50 day SMA in both August NGQ20 and September NGU20 much faster than I thought. As I said in previous posts I am interested in slowly selling credit spreads as we get to the first SMA on the call side. I am still very bullish in the medium and longer term, but this gives us the opportunity to slightly balance the position and ideally pick up option premium on both sides.

Remember that 5 days ago NGQ20 straddle prices at 1.72 were 0.24 when I sold new put spreads. Today with NG at 1.88, straddle prices are still at 0.24. The percentage of 0.24 / 1.72 (13.9%) vs 0.24 / 1.88 (12.8%) is obviously less but premiums have stayed closer in value due to an increase in volatility. I haven’t talked about volatility at all in my posts but historical volatility is shown in the charts I post. Historical volatility has more than doubled since it bottomed 2 weeks ago.

Walking through my usual trade setup, I like to sell credit spreads with a width of 0.15 with the first leg at 1.5x the current straddle price. With NGQ20 at 1.88, I see 1.89 straddles trading for ~0.24. 1.5x this price would equal 0.36 + 1.88 or ~2.24 for the first leg. The current bid / ask for 2.25 x 2.40 is 0.008 / 0.010 and I have placed orders to sell at 0.009 and 0.010. Side note, I have no idea why there are strikes at say 1.89, 1.72, and 1.67 for example but otherwise at 0.05 increments. If anyone does know why, I’m definitely curious and would love to hear from you.

As far as the chart, the 50 day SMA could also stop the rally like it did today. 2.00 NG might also be a psychological barrier to the market. The 200 day SMA should help protect and slow down the rally as it gets to 2.15. Lastly, there is plenty of congestion from the recent highs in April and May at 2.20-2.35ish. I like the trade here but momentum is still increasing on the MACD. I am selling these slowly and might sell more later this week depending on the price action. Also, for those that are more conservative, one might avoid selling the NGQ20 2.25 x 2.40 and instead look to sell September instead so that the trade can be higher than the most recent highs.

Walking through my usual trade setup, I like to sell credit spreads with a width of 0.15 with the first leg at 1.5x the current straddle price. With NGU20 at 1.95, I see 1.95 straddles trading for ~0.35. 1.5x this price would equal 0.52 + 1.95 or ~2.47 for the first leg. The current bid / ask for 2.50 x 2.65 is 0.009 / 0.011 and I have placed orders to sell at 0.010 and 0.011. As can be seen on the charts, the first leg 2.50 is above the most recent high of 2.499 that was rejected with the red candle on 5/5/2020.

I sold both August and September call spreads but my deltas are still long. I sold a small amount, enough that it makes a difference but with the ability to add to the positions later. Lastly, I had some internet problems this morning so hopefully anyone following along and watching the 50 day SMA numbers got a better price than me.

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The Heller Angle – July 2nd, 2020

My plan was to write at least once a week but that has obviously fallen off track. As far as fundamentals and price action, I’ve been dead wrong. I expected production to fall slowly by approximately 0.5Bcf per month, which I thought was conservative based on the EIA drilling productivity reports.

Instead, production has increased in the last month by 2Bcf from the bottom as oil prices came back faster than expected which caused more wells and their associated gas to come back. NGL prices stayed strong on a relative basis throughout, perhaps someone like EQT (even though they are mostly dry gas) and CNX (along with private company that uses CNXM pipes) kept more production online than expected. I know smaller company MR also said that their shut in due to low condensate prices was relatively short.

On the demand side, LNG demand is lower than I expected with more cancellations. Jeremy has covered this well and I have mentioned it that storage tanks are just too high across the world. The main reason that storage is too high is due to a warm winter across the world, obviously Covid-19 didn’t help either. When I look towards the winter months, LNG prices are strong enough to move demand back towards exporting 9Bcf that we were doing earlier this year. This will help the market tremendously, although some pricing is already expected by the NG strip. I continue to be remain bullish in the medium and longer term in part due to the market rebalancing. I am bullish short term too but continue to stay cautious due to unknowns around demand during Covid-19.

One of the reasons I am an option writer is that I can be wrong in the direction and still make money. Because the credit spreads I sold in puts in July NGN20 were far enough away, I was able to stay out of the noise and these options expired worthless. With the drop of NGN20 below 1.50, the August puts that are still open felt a little closer than I would have liked. The second advantage of being an option writer is that I already knew my risk going in as it was defined by the second purchased put. There would be no stop run or forced getting out by broker, I knew my max exposure. This positioning allows me to not worry about a current position and to think clearly if I want to make any new trades.

I think the large part of the drop on the +120Bcf storage number was due to a large number of traders and / or funds being forced to reduce risk at what looks like the worst possible time. Even though there was a large drop, I did not add any additional exposure. I wanted to see if the weakness in the storage report was a 1 week anomaly. With the storage report today, I view the last 2 reports as offsetting each other and view 6/25 as an anomaly.

While the MACD crossover to the green did not work when I posted on 6/11, MACD has now made another crossover this week. With the storage report and my view of the chart below, I am comfortable adding to my exposure to start replacing expired July NGN20 positions. With NGQ20 currently 1.729, the 1.72 straddle strike is being priced at 0.24. I am comfortable being 1.5x straddles away or 0.36 which allows me to sell another 1.35 x 1.20 put spread. The current bid ask was 0.007 – 0.009 and I was able to fill at 0.008 within about 10 minutes of placing the order. With 26 days to go and using commissions of $3.00 per leg, the total return is $74 / 1426 = 5.2% return.

Looking at the chart linked below, I see a MACD divergence with prices significantly below the 1.85ish level. If we discard the big break from the storage report, the chart looks like it may hold 1.65 – 1.70 level. Notice that the decline from 1.65 did not act as resistance on the way back up. That to me shows strength at these levels which is why I’m comfortable selling put spreads below the market.

On the call side, the market is too far away from the 50 or 200 day SMA to really interest me in selling call spreads at the current time. Since I started writing, I have not sold a call spread although I do like to be on both sides during injection season. I am watching now how the market acts at 1.85-1.90. I see a lot of congestion / resistance in March and then a smaller amount where the first yellow line I drew in mid May. If the market does not act well there, I might try to sell a call spread, especially if I feel like I can write above the 200 SMA pink / purple line. If the market acts well and does not seem to struggle at 1.85-1.90, then I would keep being patient and look to sell call spreads as the market approached the 50 day SMA. Since I’m bullish, I would be more cautious writing call spreads.

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The Heller Angle – June 11th, 2020

Fundamentally I continue to be bullish in all time frames, although most cautious in the short term (1-6 months). I think the market has already priced in weak demand and producers are shutting in production or deferring as much as they can into higher priced months in the fall. I am most concerned with short term demand as many places in the US are seeing a rise in Covid-19 cases again. There are a lot of unknowns and how people react. How much of the population self quarantines? Do businesses get shutdown temporarily if there is a known case in their building, plant etc to slow the spread? Or (less likely in my opinion) are new lock down orders put into place in hot spot areas? I really do not know what is going to happen in a potential second wave of infections. This is why I advocate to stay conservative in my trading positions in the short term.

When my fundamental view aligns with a MACD cross over, I would normally get more bullish by writing put spreads closer to the market. I would also look for opportunities to buy call spreads if I could get the risk/reward right in my mind. I might also go out past 60 days.

Today the MACD crossed over for the first time since early May. While no indicator has a perfect batting average, MACD signal has worked for me when pairing with my fundamental view.

The 1.90 straddle in NGQ20 is trading for just under 0.31 as I write. I want to be at least 1.5x or approximately 0.45 away so I am looking at credit spreads at 1.45 or below. Here is my trade. Sell the August NGQ20 1.45 x 1.30 put spread for 0.010 (filled). I also put in an order at 0.011 to see if I can get hit overnight with any drop. Otherwise, I will probably move this to 0.010 tomorrow.

Even though I am not putting on an aggressive bullish trade, let’s look at a long call spread setup to monitor and learn from. Looking at the chart again, I see potential resistance at the 50 day SMA or 2.073 as well as stronger resistance at the 200 day SMA at 2.215. Another thing I look at is the at the money call which is approx 0.15 (or 0.5x straddle as the other way to look at it) so that I don’t pay too much premium. If I am buying premium, I also want to receive a minimum of 3x max profit as some trades simply will not work. With a 1.90 call at approx 0.15, I am looking at the 2.05 call for 0.094 while selling the 2.20 call for 0.050 for a net premium of 0.044. I really like this trade setup as I like buying the call below where I think some resistance could be while also selling a second call to offset some of the premium at a second resistance area. I am using bid / ask middle but I might need to pay 0.045 or 0.046 to get this off in real life.

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The Heller Angle – June 2nd, 2020

As I’ve posted previously, I am concerned about the short term fundamentals of NG while being bullish in the medium term. After watching the market for the week (sorry it took me a week between posts!) we can see that NG supply increased by ~2Bcf while LNG exports also declined by ~2Bcf as well. It also seems like LNG exports will get worse before the get better in the fall which feels pretty far away right now.

I’ve been trading conservatively, in part due to oversupply from a warm winter worldwide as well as risk from Covid-19. In previous years, I tend to write credit spreads at ~1.0x straddle prices. Whereas this year, due to my perception of higher risks, I’ve been selling ~1.5x straddles away.

I currently have NGN20 July put spreads sold as a credit and I never was able to sell offsetting credit spreads as the market has just not rallied enough. Where I’m comfortable selling call spreads, the premiums are not worth the risk in my view. That is okay in my view, as I will wait until either my view changes or the market comes to me. With July expiration starting to get close at 23 days away, I am now starting to look at NGQ20 August put spreads.

Below is a chart of NGN20 of what I am looking at. I try to keep my chart pretty simple and am just looking at the 50 and 200 SMA along with MACD and historical volatility. Note that I am looking at NGN20 vs just NG which would be the continuous contract. The MACD indicator due in part to contango or backwardization can sometimes skew MACD and historical volatility indicators.

As I said above, I am still in the bullish camp for fundamental reasons. Even though NGN20 broke below support at 1.80, I see that selling is seeming to reach exhaustion. MACD while still below the zero line is starting to climb. Due to my fundamental view and this price action, I sold today August NGQ20 1.35 x 1.20 for 0.010. As MACD climbs above the zero line, I plan to add to this position again.

As far as the SMA 50 and 200, this is where I would be looking to sell a call spread if we reached that line. NGN20 is at 2.006 currently while NGQ20 August is at 2.086.

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