This segment focuses on natural gas futures and how trading the spread between different months can be not only a viable strategy but also one that uses capital more efficiently. Every trader can learn something here.
Natural gas futures can be volatile. The margin requirements can be large. A way to reduce the risk and the hit to buying power can be through the use of spreads between months, These are known as calendar spreads.
A calendar spread is the difference in price between a front (nearest to expiration) and a back month contract. A positive spread means the product is trading in backwardation, whereas a negative spread means the product is trading in contango.
The price curve for natural gas (as well as some other futures) often follows a seasonal pattern: It will rise in fall and winter and decline in the summer. Supplies are drawn down during the fall and winter and replenished during the summer. Because of this some parts of the curve can be in contango and others in backwardation.A graph was displayed of the winter spikes in Natural Gas from 2008 to present.
Every futures contract that has a seasonality component to its trade also has a “widow-maker” spread (kills the trader making his wife a widow). The widow-maker in nat gas is the March April spread. The pros pay close attention to it and it marks the end of the “withdrawal” season and beginning of “injection” when inventories rise. The spread has traded in a 8 cent range ($800) over the past month but has a history of large swings. A graph was displayed of the March/April Natural Gas spread from February 2014 to present.
Many times the calendar spreads trade as a separate market. This is the case with Nat Gas. That means the spread does not have to be legged and it will probably save you to trade it as a spread rather than legging it. The active months tend to have liquid, tight bid/ask differentials. Pete suggests a possible natural gas calendar spread trade.
Watch this segment of “Closing the Gap-Futures Edition” with Tom Sosnoff, Tony Battista and Pete Mulmat to learn Pete’s trade idea and to learn more about the Natural Gas Futures and the potential of trading Calendar Spreads.