The folly of ignoring the calendar for nat gas
Thought I'd share a quick lesson learned from my early days in commodities, specifically natural gas. I got caught up in a short-term move in $NG futures, saw a clear technical setup for a bounce, and entered a long position. The setup was solid, the conviction high. The problem? I completely ignored the calendar spread and, more critically, the impending change in contract months.
I was so focused on the daily chart, I didn't adequately factor in the contango/backwardation dynamics that are so crucial in energy markets, especially $NG. Rollover risk wasn't even on my radar as a primary concern for what I thought was a short-term swing. My entry was good, the market did indeed bounce, but then as we approached expiry, the roll cost just ate into all my profits and then some. Ended up closing out for a small loss, effectively paying to learn about the importance of understanding the instruments' specific nuances, not just the underlying asset's price action. Now, I always have the calendar front and center when looking at commodity futures.
It's a common trap, especially when the technicals scream one thing but the market's underlying structure, like calendar spreads, tells a different story. Did you manage to salvage the trade or was it a full learning experience?