In any trade, the differential between our purchase and sale prices represents our profit or loss. Simple and conventional. Digging a little deeper, the underlying price action actually presents another potential for profit. Simply put, the rate and magnitude of price changes of an underlying asset manifest as volatility.
In the investment and trading arena, volatility can be a tradable product as it can be priced and its value changes over time. Exploiting its potential allows for additional profit drivers, beyond simply price level differentials.
This is suitably demonstrated in the price action of Natural Gas Futures currently.
After a price surge of nearly 35% since Boxing Day, the volatility index (CVOL) for options in Natural Gas Futures has risen to nearly the highest level in a year. Calls are also trading as high, relative to Puts, as they have these past twelve months, indicating that the cost of upside protection now exceeds that of downside protection.
Although not at the highest levels seen previously, current premium levels in options on Natural Gas Futures are still reasonably attractive for short option strategies.
Short strangle on /NG[ H4 ]
Sell 2.2 strike Put, 26 Feb 2024 expiry
Sell 3.35 strike Call, 26 Feb 2024 expiry
Premium collected: ~$1500
Target take profit at 50% of premium collected.
Traders who had profited from the recent price rise can now consider capitalizing on elevated volatility levels through short option strategies.
After the recent price surge, instead of trying to chase further directional price movements, which at this juncture would have diminished probabilities of success, traders would be better off implementing strategies capturing volatility reversion and time decay. These should feature in every trader’s toolkit not only as additional profit drivers but also for their strategic value in sound risk management practices given their positive expectancy in most trading outcomes.
The Roaring Trade and Desmond Chew have joined forces to complement
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Disclaimer: All views and trade ideas expressed in this article are solely for educational and informational purposes. Nothing in this article is to be construed as investment or trading advice.
