Managing Energy Trades

rtimg_gasflameThe past week has been difficult for my open positions in the energy arena. Crude oil (/CL) has continued to tumble along with natural gas (/NG). As losses have mounted, I have managed the trades to bring in additional premium where possible without taking on excessive amounts of additional risk. At some point when a trade continues to move counter to your plan, it is time to take your loss and move on. Several weeks ago, I posted an article entitled, The Kelly Criterion – A Game Changer, where I discussed how I planned to use the Kelly formula to determine the point at which to exit a losing trade. Despite whether or not you agree with how I have chosen to implement the formula, it has been helpful to me in determining a mechanical point at which I will abandon a trade.  Today I made the decision to completely exit my natural gas position.

In the Weekend Portfolio Analysis (November 21, 2015), I detailed a strangle that I sold in /NG. Below are the details of the original trade.

Trade Details:

SELL 1 /NG Jan 16 3.4 Call @ 0.008
SELL 1 /NG Jan 16 1.85 Put @ 0.009

Credit: 0.017 ($170.00 per contract)
Max Risk: Unlimited (Breakeven Prices: 1.833 / 3.417)
Margin Required: $660.00
Days to Expiration: 39
Probability of Profit: 81.76%

I had initially set the exit point (based on the Kelly formula) to exit the trade if the loss exceeded $170.00. As /NG declined, I decided to roll down the nearly worthless 3.4 call to 2.4 on December 7th. This allowed me to collect an additional $100 in premium and, based on the new probabilities and premium collected, I recalculated my new exit point. Based on the formula, I would exit the trade if my loss exceeded $200.

This morning I awoke to find that /NG had dropped significantly creating a much larger loss that $200. I immediately entered orders to close the position. Below are all of the trades.


After all of the trade adjustments and commissions, the total loss for the position was $501.36.

It is never fun to take losses, and had I not set a point to exit the trade, I may have held onto the position with the hope that the commodity would reverse. However, in trading, ‘hope’ is never a good plan. However, I would rather take a small loss (less than 5% of my account) as opposed to a large one later on.

  • Good article. I agreed. We don’t want to hope that our trades will turn around. Even if you follow your rules and lost money, it is a good trade. A bad trade is where you didn’t follow your rules and made money. I have no issues taking small losses since it is the big portfolio-killing losses that I am most worried about.

  • The Lazy Trader

    trading naked options takes some balls my friend.
    Kudos to you for not closing your eyes ad believing the dogma of never closing a trade for a loss.