How to lose Rs 1.3 Lac in two days of trading

Most of the times, I write on serious business, investments and trading strategies. However, this time around I could not stop myself from letting go what happened in the last two trading sessions of the commodities markets. This is with reference to the expiry of the February series contract of Natural Gas. Although, my sympathies with those who lost big money by trading in that contract, I would like to highlight the high risk and manipulation game played by operators in the markets.

 

 

 

For starters, the MCX Natural Gas February futures zoomed as much as 30 per cent in the month of February at its highest point of Rs 402.70 - registered on 24 February, 2014. The corresponding February futures in the United States (US) soared by nearly 31 per cent, and topped at $ 6.378 on 20 February, 2014 (investing on natural gas). The fundamental reason for such an unprecedented rise in Natural Gas futures was the severe cold weather in US, which resulted into sub-zero temperatures on numerous occasions leading to higher usage of gas for heating purpose. In US, heaters are used to warm houses in order to beat the cold outside.

 

Now coming to the trading aspect, on an average the MCX Natural Gas open interest stands around 10,000-12,000 contracts, which was again the case around 14 February 2014, when the open interest for the February series stood at 12,297 contracts. The real action began post that. In the following three trading sessions, the prices jumped by 3.9 per cent (17 Feb), 1 per cent (18 Feb) and 11.3 per cent (19 Feb) – a staggering 17 per cent gain in just three days and the open interest from 12,297 contracts surged to 19,023 contracts – indicating aggressive long positions by punters (read operators). During the same period, the MCX Natural Gas March futures gained 1.4 per cent (17 Feb), 0.3 per cent (18 Feb) and 4.5 per cent (19 Feb) – a total gain of mere 6.4 per cent when compared to the near 17 per cent surge for the February contract.  The open interest for the March series also moved higher 2,628 contracts to 7,499 contracts. The reason for dis-parity in prices was that the short-term demand for Gas was higher in US, and the same may recede once the cold wave eases.

 

 

 

However, back in India, the traders who had short Natural Gas at lower levels of Rs 330-or so, and not placed any stop loss, were left in lurch with the only option - HOPE. Some of them may have ended up cutting losses at highs of Rs 380-390 odd levels, as the open interest dropped from 19,023 lots to 15,175 odd lots in the next two trading sessions for the February series. Just imagine, a trader buys MCX Natural Gas February futures at the highest point (Rs 402.7) on 24 February. The person if exited at the lowest point yesterday on expiry (Rs 297.6) would have lost a whopping Rs 1.31 lakh in just two trading sessions. Hence, trading is always said to be a risk business, and trades should be done with strict stop losses.