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Futures, Options Vie for Traders' Attention and Market Direction

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 trading day.

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, 1998.

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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