Options allow traders to leverage their bets on the underlying assets represented by the choice. These handy financial instruments might be used to trade stocks, bonds, currencies, and even futuresand commodities. In this text, we are going to concentrate on the fundamentals of trading natural gas options.
Overview
Unlike options to sell or purchase stocks, where the choice might be executed in exchange for the underlying asset directly, natural gas options are exercised into futures contracts that represent natural gas contracted for delivery. This just isn’t something a trader should lose sleep over, as a futures contract is as much of a security as a stock certificate.
In practice, natural gas options operate like every other kind of option, with a call representing an extended position and a put representing a brief position. While a trader can go full bull or bear by buying one or the opposite, it’s more common to make use of strike prices to create a ramification over which the combined options can yield a good return with controlled risks. In fact, once you begin combining calls and puts in a variety of strike prices and factoring within the deadlines, you possibly can find yourself with complex strategies that sound like failed 80s hair metal bands, comparable to the “iron condor.”
Influences on Natural Gas Prices
All directional bets like bear spreads and bull spreads, and even neutral strategies just like the butterfly spread, require a trader to have an idea about which way natural gas prices are going, based on available data. For options on US natural gas, the US Energy Information Administration (EIA), is the place to get all the data on supply levels, production, and variation from historical norms. The EIA also tracks imports and exports of gas. While the International Energy Agency is a source for tracking production changes abroad.
It just isn’t all about supply and production, nevertheless, as weather could be a wildcard that throws off forward-looking projections. For instance, hot summers can drive up natural gas prices as more energy is consumed to power air-con. The worth of oil also has an impact, because the equipment might be shared and the identical corporations could also be exploring and producing each oil and gas. For example, the shared technological advance through hydraulic fracturing has increased the production of each oil and gas within the US, driving down the worth of natural gas during times when it will have traditionally risen.
The Bottom Line
Natural gas options and the strategies used to trade them are the identical as for some other option. The difference, and the predominant challenge for traders, is that the aspects that influence natural gas prices are those of a commodity relatively than a stock. There are not any quarterly earnings numbers to cause volatility at set intervals, nor a single CEO hiring or firing that may show up on the worth chart. Trading natural gas options requires getting acquainted with the EIA reports, liquefied natural gas (LNG) export numbers and so forth. Once you have got the information, there are multiple strategies that might be used to benefit from the expected directional change or price volatility/stability.