Going Nowhere Fast
Trading Ideas
Traders anticipating a range bound Natural Gas market to end the year may possibly wish to explore trading strategies that could benefit from a sideways market. One such strategy would be selling strangles in Natural Gas options. For example, with January Natural Gas trading at 4.317 as of this writing, the January 3.40 puts and the January 5.40 calls could be sold for about 0.038, or $380 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in December should January Natural Gas be trading above 3.400 and below 5.400. Given the potential risk involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such strategy would be to close-out the position before expiration should the option premium for the strangle trade at 2.5 times the amount received for originally selling the strangle.
Fundamentals
Natural Gas futures seem poised to remain range bound to end 2010, as record high storage levels battle against the beginning of the winter heating season. This past Thursday’s EIA Gas Storage report showed 3 billion cubic feet (bcf) of Gas was placed into storage last week, bringing the yearly total in storage up to 3.843 trillion cubic feet (tcf), or just over 9% above the 5-year average for this time of year. Relatively low Natural Gas prices have caused some producers to curtail production, triggering a decline in the U.S. Gas rig count last week. Weather forecasters are calling for below normal temperatures in the eastern U.S. later this week, which has put a bid into front month futures, as increased demand for heating should increase gas usage. So barring a large increase in industrial demand or a much warmer than normal winter, Natural Gas prices seem destined to be struck in a trading range between 3.000 and 5.000.
Technical Notes
Looking at the daily charts for January Natural Gas, we notice prices moving within a relatively narrow 60-cent range since the beginning of October. Since that time, the market has moved on either side of the 20-day moving average, but is now currently near the upper end of the recent price range. The 14-day RSI has turned up, with a current reading of 56.84. Support for January Gas is seen at the contract low of 3.853, with resistance seen at the recent high of 4.411 recorded on November 10th.
Mike Zarembski, Senior Commodity Analyst
