Option Strategy for Natural Gas Sideways Trend

January 11, 2018 12:57PM CST

The natural gas trend has been travelling sideways for the last week.  The up and down prices this week have us balancing between a bull and bear market.   Momentum indicators are all around mid-levels and not much help in predicting direction.  A close beneath 2.700 will signal a turn to the downside.  Above 2.991 may take us to a range from 3.000 to 3.200. 

Today’s draw on storage of -359 bcf is more than the estimate of -318 bcf.  I think this may have been baked into the price already because of the frigid weather last week.  The milder weather this week should give way to temperatures back in the normal range for this time of year.  The nearby forecast calls for colder weather in the East and South.

Since the market seems to want to stay sideways, I’d like to talk a little about an option strategy that should be favorable in a non-trending market.  In this example, you can sell options above and below the current price.  I’m picking the strikes by prices I wouldn’t mind being long or short from.  I’m also looking for a decent amount of premium to collect.   At this time we would collect approximately $330 for the 2.550 March put and $600 for a 3.500 call, also for March.  As long as the price of natural gas stays between 2.550 and 3.500 we keep all the premium collected.  If we get assigned a futures contract at expiration, I won’t mind being long or short from the strikes.  We will also keep the premium collected as well as being in good position.  As long as the market keeps moving sideways in a range, this strategy should continue to be profitable.

Natural Gas Mar '18 Daily Chart

natural_gas_mar18_daily_chart

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