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Using Options and Spreads to Trade Natural Gas

Wednesday, July 21, 2021 at 7:01PM

Natural gas prices , as the reader is very likely aware of, have been on quite a tear in the last couple of months, reaching their highest levels since the Fall 2018 rally, having broken out of the recent “consolidation” range this week, sending the prompt month August contract closer to the $4.00 level.

prompt month natural ags

The move higher has led to an increase in day-to-day volatility, and some rather wide daily trading ranges over the last month.

avg prompt month natural gas daily trading range

When playing flat price, i.e. being outright “long” or “short”, profits can be significant if the trader is able to capture the right move, but risk of loss is also significant when prices are moving around in wider ranges. One way to mitigate risk is through the use of options and spreads. In our Wednesday Seasonal Trader Report, available for all Trader level subscribers, we provide the trader with some strategies that, assuming our read on weather and fundamentals is correct, can secure a profit with less risk involved compared to an outright position. As an example, this is from our report last week:

past year of natural gas strips

All of these strategies were skewed in the bullish direction, but by using options and spreads, one can limit the risk involved, and in some cases, such as with covered calls, can still turn in a profit even if flat price moves somewhat against the prevailing view. In this case, all four trade ideas proposed are in the money.

We, of course, cannot give a full crash course on options and spreads here in this blog, but do think these strategies may be useful as a part of any active trader’s portfolio. As mentioned above, we offer strategies each week for Trader level subscribers as a supplement to our weather and fundamentals analysis, giving the reader something actionable. We invite you to sign up for a 10-day FREE trial here to take a closer look at this, as well as our entire suite of products designed to keep natural gas traders a step ahead of changing market conditions.

Originally Posted on July 21, 2021 – Using Options And Spreads To Trade Natural Gas

Disclosure: Bespoke Weather Services

Disclaimer: Bespoke Weather Services, LLC believes all information contained in this note to be accurate, but we do not guarantee its accuracy. None of the information in this post or any opinions expressed constitute a solicitation of the purchase or sale of any securities or commodities.

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Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

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Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.

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Disclosure: Options Trading

Options involve risk and are not suitable for all investors. For more information read the Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD). To receive a copy of the ODD call 312-542-6901 or copy and paste this link into your browser:

http://www.optionsclearing.com/about/publications/character-risks.jsp

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