Looking at the Daily Natural Gas June 2014 chart below, you can see that Natural Gas prices came off a spike in prices to 4.893 back on 2/24 (#1 point) and over the past couple weeks has formed a wide 1-2-3 top before breaking thru the #2 point of 4.416 today. The 50% Retracement level on the Daily Natural Gas chart is 4.215. The reason we are looking at the June Daily chart is because Margin on a Natural Gas Futures Contract is too high (~$9,800). If we were to trade this market, we would buy an out-of-the-money Put option with at least a couple months of time left on it, which would cost a fraction of the Contract Margin. Therefore, we look at the June chart which has plenty of open interest volume.
A 430 June Put option is currently ~$1100 at the time of this post and June 2014 Natural Gas Prices are currently trading around 4.42. Today, prices have been as low as 4.385, which is below the #2 point on the Daily Natural Gas chart.
The problem with this trade is there isn’t much room between a 430 Put option and the 50% Retracement level of 4.215 (assuming prices drop that low). To risk $1100 on an option (or less, if we sell it while it has value) for the possibility of making ~9 points ($900) is not the kind of opportunity we like to trade, so we’re going to pass.
If you look at the Weekly Natural Gas chart (see below) you’ll note the 50% Retracement level is 4.20 (not much different from the Daily Natural Gas chart 50% Retracement Level). This means we don’t really have any expectations that prices could drop much past ~4.20 and therefore not much profit potential. No thanks.