You Have to Know Why

I exited my Northern Technology (NTI) short put (bullish) position today as the stock ran up toward $23 a share.  Of course, I didn’t get the last dollar of potential profit, but that’s not my goal.

What happened next amazed me.  About a half hour before the close, the stock started dropping like a stone, falling as low as $20.24.  Since I entered the trade by selling those $22.50 puts for about $2 each, if I had still held the position, it would have been a net loss at that point.  Boy, did I feel lucky.

Then, almost as quickly, the stock started going back up, closing the day right around $22 a share.

I even started playing “what if” in my mind, thinking how I could have re-entered the position for even more potential profit.

But I didn’t, and I’m glad.

I’m glad I didn’t make those brilliant trading moves because I didn’t know why the stock was trading the way it did, and planning on being lucky is generally not a strategy that keeps you in the game.

So here’s what happened:

This afternoon there was a small leak in the input pipes at the refinery (NTI’s one and only refinery).  Following standard safety procedures, all workers in the affected area were evacuated, and authorities were notified.  No doubt that’s why the stock fell $3, as the news spread.  In a matter of minutes, hundreds of thousands of shares were dumped.

Then, a few minutes before the market closed, NTI advised the investors on their e-mail mailing list that the incident was cleared up with no interruption of the daily flow totals expected.

So now I know three things:

  1. Why the stock suddenly dropped.
  2. Why the stock recovered nearly all of its loss just minutes later.
  3. The company has an investor notification e-mail I can sign up for.

So I got involved in this company thinking I knew the risks, but without setting myself up to find out all I could, in real time.  I did get reminded of one of the risks that kept me from making this a larger commitment in the first place — the company is a living example of single point failure.

It still looks like they will be able to distribute $2 a share for next quarter, but, as we saw today, that could stop completely at any time.

Even refiners with several plants have a tough business, because “crack spreads” are notoriously volatile. They can even go negative, which just kills refiners.

[Crack spread equals the difference between the price of a barrel of crude oil and the combined price of the distillates like gasoline, asphalt tar and diesel fuel that barrel produces.]

The reason those spreads occasionally go negative is that supply-demand effects in the supply chain can push the price of crude up while the big integrated companies like Exxon can still make enough profit in the other parts of the business to keep operating.

Anyway, I’ll be watching, and also be signing up for the notification with the company.  I’ll also continue to keep this less than 5% of my total exposure.

hh

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