Short Natural Gas: Top Trade Opportunities

Fresh on the heels of the US-EU partnership to reduce Europe’s dependence on Russian energy sources, Natural Gas futures continue to reach new highs. Natural Gas contracts are up nearly 40% YTD and supply substitution is likely to remain a focus over the next few months.

YTD Percentage Returns

Source: tastyworks

Implied volatility has expanded in the last few trading sessions, opening up opportunities to sell option premium with the expectation of a volatility contraction. With monthly expirations in /NG futures, traders can look at a variety of options trading strategies based on their directional assumption and short and long-term outlook. Additionally, traders looking to get exposure outside of utilizing futures options can also consider a correlated ETF like UNG.

3 Month Correlation of Energy Products

Source: tastyworks

Over the next 90 days, the expected move is +/- 1.37 in the futures. /NG futures options typically demonstrate call skew, meaning that the call options often trade richer than their corresponding, equidistant put options. With that in mind, traders might be able to go further out of the money on the call side and still collect adequate credit, enhance their breakeven, and improve their probability of success. Options strategies that take advantage of call or “reverse” skew are the Call Ratio, the Call Broken Wing Butterfly, the Reverse Jade Lizard, and Dynamic Width Iron Condors to name a few.

Personally, I’ll be looking at bearish-to-neutral setups in /NG futures options over the next three months in hopes of sideways to downside price action. As buying power is always top of mind for traders in smaller accounts like mine, a defined risk options strategy is my go-to. Plus, given the volatility in recent months, having a defined profit and loss on entry enables me to step away from my platform and protect myself if I’m directionally wrong.