Trading natural gas options

Options allow traders to take advantage of their bets on the underlying asset represented by the option. These convenient financial instruments can be used to trade stocks, bonds, currencies, and even futures and commodities. In this article, we will focus on the basics of natural gas options trading.

Overview

Unlike options for selling or buying stocks, which can be directly executed in exchange for the underlying assets, natural gas options are exercised in futures contracts, which represent natural gas for which delivery contracts have been signed. This is not something that traders should have insomnia, because futures contracts are as secure as stock certificates.

In practice, natural gas options operate in the same way as all other types of options. Call options represent long positions and put options represent short positions.Although a trader can be fully bullish or bearish by buying one or the other, it is more common to use the strike price to create a spread on which a combination of options can generate considerable returns while controlling risk. Of course, once you start to combine call options and enter a series of strike prices and consider time constraints, you will end up with complex strategies that sound like the failed metal bands of the 80s, such as “Iron Sculpture.”

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Impact on natural gas prices

All-round bets such as bear market spreads and bull market spreads, and even neutral strategies such as butterfly spreads, require traders to understand the trend of natural gas prices based on available data. For U.S. natural gas options, U.S. Energy Information Administration (EIA) is the place to get all the information about supply levels, production and changes in historical regulations. EIA also tracks the import and export of natural gas.Although International Energy Agency It is the source of tracking changes in foreign production.

However, this is not entirely related to supply and production, as the weather may be a wildcard that can affect forward-looking forecasts. For example, the hot summer will push up the price of natural gas because air-conditioning requires more energy. Oil prices also have an impact because equipment can be shared, and the same company may explore and produce oil and natural gas at the same time. For example, technological advancements shared through hydraulic fracturing have increased U.S. oil and natural gas production, and have depressed natural gas prices during a period of traditional increases.

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Bottom line

Natural gas options and their trading strategies are the same as any other options. The difference, and the main challenge for traders, is that the factor that affects natural gas prices is commodities rather than inventories. No quarterly earnings data will cause fluctuations within a set time interval, and no CEO recruitment or dismissal will appear on the price chart. Trading natural gas options requires familiarity with EIA reports, liquefied natural gas (LNG) export figures, etc. After obtaining the data, a variety of strategies can be used to profit from expected changes in direction or price fluctuations/stability.

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