Why We’re NOT Shorting Natural Gas Futures

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.

Daily Natural Gas 3-13-14 June 2014Weekly Natural Gas 3-13-14

Natural Gas Breaks Through 50% Retracement to the Downside

We have been watching the new high in Natural Gas futures (see our post New 12-month High in Natural Gas Futures) and waited for a 1-2-3 top to form, which it did over the next several trading days.  See the Daily Natural Gas chart below.

When the 1-2-3 top formation completed, we put a Sell order to short March 2014 Natural Gas futures when prices broke below the #2 point of 4.18.  The 50% Retracement level (according to the Daily chart below) is at 4.01 which it surpassed yesterday, 1/9/14, when it closed at 3.977.  As of today, 1/10/14, prices have dipped even more to as low as 3.936 at the time of this post.   We look at the Weekly Natural Gas chart to anticipate a new 50% Retracement level to see how much more downside profit potential this trade has.  According to the Weekly Natural Gas chart below, the 50% Retracement level is 3.8395.

We bought a 405 Put option (~3 strike prices out of the money) when prices broke through the #2 point at 4.18 2 days ago (1/8/14) for $1250.00.   Today our 405 Put option is worth $2350.00 (at the time of this post).  Since prices went as low as 3.936 today before bouncing back up and there isn’t that much downside left in this trade, we decided to sell our 405 Put option and take the profit.

We profited $1100 on this trade shorting the Natural Gas futures market using a Put option in 2 days for a 188% profit.

 

Daily Natural Gas March 2014

Weekly Natural Gas 1-10-14

New 12-month High in Natural Gas Futures

Looking at the Weekly Natural Gas (NYMEX) chart below, a new 12-month high has been reached in Natural Gas Futures.   Although one may think from a Monthly Natural Gas chart that this high isn’t very high at all (see Monthly Natural Gas chart below) when in June of 2011 Natural Gas reached 4.983, the fact is that Natural Gas prices have been severely depressed for since fracking (hydraulic fracturing) that started a few years ago has greatly increased Natural Gas supplies and hence has depressed prices.

Therefore, for Natural Gas prices to reach the level of 4.550 we see in the March 2014 Daily Natural Gas chart below is actually a new high.  Prices haven’t been this high in over a year and therefore we will watch for a 1-2-3 top formation so we can short the Natural Gas Futures market.

Daily Natural Gas - March 2014

Monthly Natural Gas Weekly Natural Gas