Futures, Options Vie for Traders' Attention and Market Direction
Frenetic activity continued in the natural gas pit yesterday in
a see-saw battle that produced two rallies, two dips and one
enormous 11.5-cent trading range. By the time the dust had settled
and the orders were processed, the battle-weary August contract
managed a 3.2-cent advance to settle at $2.574 on its penultimate
For the fourth day in a row estimated volume surpassed the
100,000-contract mark. In fact, activity last Friday set a new
all-time volume record for natural gas, with 203,807 contracts
changing hands, Nymex confirmed Tuesday. The previous record dates
back to Sept. 26, 1997 when 168,057 contracts traded. And just two
days later another volume record may have been broken Tuesday. With
an estimated volume of 40,916, natural gas options trading easily
surpassed the previous volume record of 35,334 set on Sept. 16,
Local traders were active in the market right from the opening
bell yesterday as they bid prices higher in expectation of heavy
market-on-close (MOC) buying, noted Ed Kennedy of Miami-based
Pioneer Futures. MOC orders are used by hedgers in an attempt to
replicate as closely as possible the average of the last three days
settlements, which is what a bulk of their swaps specify. However,
the floor traders guessed wrong, and instead of MOC buying, the
market was hit with MOC selling, forcing them to liquidate
positions into the closing bell, he said.
In addition to speculative buying and selling, yesterday's
market was influenced by hyperactivity on the last day of August
options trading. While options activity usually has little or no
effect on the futures market in a period of high futures volume,
Kennedy noted that in quiet periods-such as midday yesterday-it
does have an impact. "As the August contract slipped back below
$2.575 yesterday, there was a round of [futures] selling by the
writers of $2.60 call options who could safely exit some of their
long positions," he said.
Does that point to more losses for the market the rest of the
week? Depends on what month you are taking about, insists Kennedy.
"While I would not bet against August continuing lower to reach a
final settlement below $2.50, I also am very bullish on September
and look for prices to rebound higher."
As of 7 PM last night the August contract had already dipped 4.4
cents from Tuesday's settle.
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