Natural Gas Futures (/NG) (second most actively traded energy contract) made a low on March 4th, and have had a steady rebound since. Are there still opportunities in the futures, futures options or along the curve? Pete Mulmat joins Tom and Tony to share his thoughts, extensive knowledge and provide a possible trading opportunity.
Pete pinpointed an opportunity trading the curve in Natural Gas. The market is now in steep contango with the front month having the lowest price and the farthest out month having the highest price. Pete expects the curve to flatten with the front month rising in relation to the back months. The move in the curve has gone to an extreme level especially in relation to the move in the front month. Usually the curve would flatten when the front month had been climbing.
Pete laid out his Futures Calendar Spread trade idea. It was to buy the /NG June 2016 and sell the /NG July 2016. The implied volatility (IV) and implied volatility rank (IVR) in /NG were higher than many other markets and the IV percentile was 56%, meaning IV is lower more often than it is higher from where it currently is. Pete thought it prudent, given the unusual move in the curve relative to the front month’s action, to include some short Deltas as a hedge. That would also benefit from theta (time decay). He identified the /NG July 27 calls as the place to sell option premium. Those calls have a 17 Delta, at about the same level as the one Standard Deviation Strangles we like to sell. Pete also noted the total margin for the trade.
For more information on Natural Gas see:
Closing The Gap Futures Edition from June 5th, 2015: “Natural Gas (/NG)”
Closing The Gap Futures Edition from October 30th, 2015: “Natural Gas and Seasonality”
Closing The Gap Futures Edition from March 18th, 2016: "Natural Gas Current Opportunities"
Watch this segment of “Closing the Gap-Futures Edition” with Tom Sosnoff, Tony Battista and Pete Mulmat for all the details on Pete’s trade idea, a better understanding of the Natural Gas market and an important insight into traders noted in the middle of the segment.
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