Buying (Going Long) Natural Gas Futures to Profit from a Rise in Natural Gas Prices

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Contents

Buying (Going Long) Natural Gas Futures to Profit from a Rise in Natural Gas Prices

If you are bullish on natural gas, you can profit from a rise in natural gas price by taking up a long position in the natural gas futures market. You can do so by buying (going long) one or more natural gas futures contracts at a futures exchange.

Example: Long Natural Gas Futures Trade

You decide to go long one near-month NYMEX Natural Gas Futures contract at the price of USD 5.5150 per mmbtu. Since each NYMEX Natural Gas Futures contract represents 10000 mmBtus of natural gas, the value of the futures contract is USD 55,150. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 8,775 to open the long futures position.

Assuming that a week later, the price of natural gas rises and correspondingly, the price of natural gas futures jumps to USD 6.0665 per mmbtu. Each contract is now worth USD 60,665. So by selling your futures contract now, you can exit your long position in natural gas futures with a profit of USD 5,515.

Long Natural Gas Futures Strategy: Buy LOW, Sell HIGH
BUY 10000 mmBtus of natural gas at USD 5.5150/mmbtu USD 55,150
SELL 10000 mmbtus of natural gas at USD 6.0665/mmbtu USD 60,665
Profit USD 5,515
Investment (Initial Margin) USD 8,775
Return on Investment 62.8490%

Margin Requirements & Leverage

In the examples shown above, although natural gas prices have moved by only 10%, the ROI generated is 62.8490%. This leverage is made possible by the relatively low margin (approximately 15.9112%) required to control a large amount of natural gas represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

Learn More About Natural Gas Futures & Options Trading

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Buying Straddles into Earnings

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Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

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Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Selling (Going Short) Natural Gas Futures to Profit from a Fall in Natural Gas Prices

If you are bearish on natural gas, you can profit from a fall in natural gas price by taking up a short position in the natural gas futures market. You can do so by selling (shorting) one or more natural gas futures contracts at a futures exchange.

Example: Short Natural Gas Futures Trade

You decide to go short one near-month NYMEX Natural Gas Futures contract at the price of USD 5.5150/mmbtu. Since each Natural Gas futures contract represents 10000 mmBtus of natural gas, the value of the contract is USD 55,150. To enter the short futures position, you have to put up an initial margin of USD 8,775.

A week later, the price of natural gas falls and correspondingly, the price of NYMEX Natural Gas futures drops to USD 4.9635 per mmbtu. Each contract is now worth only USD 49,635. So by closing out your futures position now, you can exit your short position in Natural Gas Futures with a profit of USD 5,515.

Short Natural Gas Futures Strategy: Sell HIGH, Buy LOW
SELL 10000 mmBtus of natural gas at USD 5.5150/mmbtu USD 55,150
BUY 10000 mmbtus of natural gas at USD 4.9635/mmbtu USD 49,635
Profit USD 5,515
Investment (Initial Margin) USD 8,775
Return on Investment 62.8490%

Margin Requirements & Leverage

In the examples shown above, although natural gas prices have moved by only 10%, the ROI generated is 0.0000%. This leverage is made possible by the relatively low margin (approximately 15.9112%) required to control a large amount of natural gas represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

Learn More About Natural Gas Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

How to Start Day Trading Natural Gas

Spooh / Getty Images

The price of natural gas fluctuates from moment to moment, as it is publicly traded on an exchange. The price of natural gas is determined by global supply and demand for the physical commodity, as well as the expectations and supply and demand from traders. Day traders don’t assess the “real” value of natural gas. Instead, day traders profit from daily price fluctuations in the commodity, attempting to make money whether it rises, falls or its value stays nearly the same.

Futures Markets

Day trading natural gas is speculating on its short-term price movements. Physical natural gas isn’t handled or taken possession of, rather all the trading transactions take place electronically and only profits or losses are reflected in the trading account.

There are a number of ways to day trade natural gas. One way is through a futures contract. A futures contract is an agreement to buy or sell something–like natural gas, gold, or wheat–at a future date. Day traders close out all contracts (trades) each day and make a profit or loss on each trade based on the difference between the price they bought the contract and the price they sold it.

Natural gas futures trade through the Chicago Mercantile Exchange (CME Group). There are several types of natural gas, and contracts, which can be traded. The most heavily traded contract, preferred by day traders, is the Henry Hub Natural Gas Futures (NG). Each contract represents 10,000 million British thermal units (mmBtu).

On the futures exchange, the price of natural gas (NG) fluctuates in $0.001 increments. This increment is called a “tick”–it’s the smallest movement a futures contract can make. If you buy or sell a futures contract, how many ticks the price moves away from your entry price determines your profit or loss. To calculate your profit or loss (your trading platform shows you, but it’s good to understand how it works) you’ll first need to know the tick value of the contract you’re trading.

For a Natural Gas contract (NG) the tick value is $10. This is because the contract represents 10,000 mmBtu, and 10,000 mmBtu multiplied by the $0.001 tick size results in $10. That means for each contract, a one tick movement will result in a profit or loss of $10. If it moves 5 ticks, you win or lose $50. If it moves 5 ticks and you’re holding 3 contracts, your profit or loss is $150.

Trading Accounts and Margin

The amount you need in your account to day trade a natural gas (NG) futures contract depends on your futures broker. NinjaTrader for example, requires you have $1000 in your account to open a day trading position for one natural gas (NG) contract. You also need enough in the account to accommodate for potential losses (need much more than $1000).

These figures assume you’re day trading and closing out positions before the market closes each day. If you hold positions overnight, you are subject to Initial Margin and Maintenance Margin requirements, which will require you have more money in your account.

ETFs and Stock Market NG Plays

Another way to day trade natural gas is through a fund which trades on a stock exchange, like the United States Natural Gas Fund (UNG). Or, if seeking a more volatile option (moves three times as much each day), the 3X Long Natural Gas ETN. If you have a stock trading account you can trade the price movements in natural gas.

The 3X Inverse Natual Gas ETN (DGAZ) is another popular natural gas ETF. Since it is an inverse fund, it moves in the opposite direction of the natural gas price, on a daily basis.

The intraday price movements of these products are reflective of daily (not long-term) percentage price changes in natural gas.

The products trade like stocks. The minimum price movement is $0.01, therefore you make or lose $0.01 for each share you own each time the price changes by a penny. Stocks and ETFs are typically traded in 100 share blocks (called lots) so if the price moves a penny and you’re holding 100 shares, you make or lose $1. If the price moves $1, from $5 to $6, you make or lose $100 on your 100 share position. If you are holding 500 shares, you make or lose $500 on that same price move.

The amount you need in your account to day trade a natural gas ETF depends on the price of the ETF, your leverage, and position size.

To become a day trader of stocks or ETFs in the U.S., you need to have a $25,000 minimum trading account balance. Depending on how much income you want to generate and your leverage, you may wish to have more than $25,000 available to you.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

3 Stocks to Play a Rebound in Natural Gas Prices

Rise in demand from earlier estimates may support prices this week

Ramped up natural gas production helped push the commodity’s price to its lowest summer levels since 1998. The U.S. Energy Information Administration (EIA) projects that gas production will rise 10% in 2020, backing up a 12% increase in 2020 – its biggest annual percentage output gain in nearly 70 years.

Despite this bearish backdrop along with EIA data last week showing an unexpected build in natural gas inventories, the commodity staged an impressive late-week reversal to close 6% above its intra-week low. The surprise turnaround in prices may relate to a Reuters weather forecast model that suggests a rise in demand of 2.35 billion cubic feet (Bcf) to 11.3 Bcf over the next two weeks from the earlier estimated figures, according to marketrealist.com.

Those who think that recent trading action indicates that prices have mostly factored in the unfavorable fundamentals should consider taking a long position in one of these three large natural gas producing companies that tend to track the commodity’s fortunes. Let’s examine each firm in more detail and work through several bullish trading scenarios.

EQT Corporation (EQT)

With a market capitalization of $2.63 billion, EQT Corporation (EQT) operates as a natural gas production company in the United States. The Pittsburgh, Pennsylvania-based energy giant held 21.8 trillion cubic feet (Tcfe) of proved natural gas, natural gas liquids (NGLs), and crude oil reserves as of the end of 2020. EQT’s second quarter (Q2) adjusted earnings came in at 9 cents per share, above analysts’ expectations calling for a loss of 4 cents. Revenue for the period also topped forecasts and grew 38% from the year-ago quarter. Furthermore, natural gas sales volume increased to 370.1 billion cubic feet (Bcfe) from 362.5 Bcfe in the 2020 June quarter. The company’s stock issues a 1.13% dividend yield and has tumbled almost 50% year to date (YTD) as of Oct. 7, 2020.

EQT’s share price set a fresh 52-week low on Thursday, Oct. 3, but promptly reversed the next trading day to print a hammer candlestick and close above the September swing low. Also, a bullish divergence between price and the relative strength index (RSI) has formed to suggest waning seller momentum. Trade a possible double bottom by setting a take-profit order near last month’s high at $13.12 and placing stops underneath Thursday’s low at $9.06.

Chesapeake Energy Corporation (CHK)

Chesapeake Energy Corporation (CHK) engages in the exploration and production of oil, natural gas, and NGLs in the United States. At the end of last year, the company held interests in roughly 13,000 oil and natural gas wells. The $2.58 billion natural gas producer reported a loss of 10 cents per share, which compares to a profit of 15 cents per share in the prior-year quarter. However, Chesapeake’s revenue surpassed the Street expectation by nearly $500 million to record year-over-year growth of 48%. Analysts have a 12-month price target on the stock at $1.95, representing 43% upside from Friday’s $1.36 closing price. As of Oct. 7, 2020, the Oklahoma City-based company’s share price trades down 35.24% on the year.

Chesapeake shares trended consistently lower between April and July, but like EQT, the stock appears to be forming a possible double bottom. A retracement over the past two weeks has found support from the August swing low and a five-month trendline. Buying this week on the back of higher natural gas prices has the potential to trigger a short covering-fueled rally, given that nearly 25% of the company’s float is held short. Traders who go long should look for a retest of crucial overhead resistance around $2. Set stop-loss orders beneath either the Oct. 3 low at $1.28 or under the August bottom at $1.26, depending on personal risk preference.

Southwestern Energy Company (SWN)

Texas-based Southwestern Energy Company (SWN) operates as an independent energy firm that explores for, develops, and produces natural gas and oil. The 90-year-old company’s estimated proven natural gas, oil, and NGLs reserves amounted to almost 12 Tcfe as of Dec. 31. 2020. Although the energy player came in just shy of Wall Street’s top- and bottom-line Q2 forecasts, UBS Group upgraded Southwestern Energy stock from “sell” to “neutral.” The Swiss investment bank estimates the current net asset value for the stock at $1.90 per share based on NGL pricing, actual costs, and restructuring progress. Southwestern Energy stock has a $1.02 billion market cap and is down 44.87% YTD as of Oct. 7, 2020.

Since jumping 65% from its 2020 YTD low, the company’s share price has given back most of those gains over the past month of trading. Despite the recent fall, the stock now finds support from a previous downtrend line that extends back to April/May. Those who take an entry should book profits on a move to $3.25, where price may encounter stiff resistance from the December 2020 swing low and falling 200-day simple moving average (SMA). The trade offers an excellent risk/reward ratio of over 1:7, assuming a stop positioned below support at $1.70 and an execution at Friday’s $1.88 closing price ($1.37 profit per share vs. 19 cents risk per share).

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