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Closing the Gap - Futures Edition

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Natural Gas Current Opportunities

Closing the Gap - Futures Edition

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Natural Gas Futures (/NG) are the second most actively traded energy contract and have seen a large sell-off that has traders wanting to get long, but the steep contango makes staying long difficult as the cost basis rises with each roll forward.

The fundamentals of Natural Gas futures were discussed. The supply and demand situation was addressed as well as how demand has changed due to the increasing use of natural gas to produce electricity. Production costs and the delivery point were mentioned. The basics of the futures contract were set out on a table and explained.

How high stockpiles are helping to steepen the contango in the future spreads (month versus month) was explained. Also noted was the unusual situation in Implied Volatility (IV). Usually a decline in a commodity will see lower IV but this has not been the case here. IV and Implied Volatility Rank (IVR) are high.

A trade idea was proposed of using future options to get long deltas, and using a futures calendar spread to counteract the contango. The details were laid out in a table and the reasoning was explained.

Watch this segment of Closing the Gap-Futures Edition with Tony Battista, guest host Pete Mulmat and a special appearance by Mike Hart (Beef) from our research team for the valuable takeaways, a ndbetter understanding of the Natural Gas futures market.

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