Today's Idea

With the Natural Gas market remaining quiet and a bias to the upside should any issues occur, some traders may wish to explore a position that will benefit if prices go up, stay neutral or go down slightly. An example of one such position would be a long ratio put spread. For example, with December Natural Gas trading at 4.247 as of this writing, the December 4.000 put could be bought and 2 December 3.800 puts sold for a net credit of 0.008, or $80 per spread, not including commissions. This type of trade is best done for a net-credit, as it increases the range of prices that will still allow the trade to be profitable at expiration.

Fundamentals

Once one of the most volatile of all markets, Natural Gas futures have taken on a new persona, as prices have been range bound for the past 18 months. Since February of 2010, lead month futures have been stuck in a relatively narrow $2 price range, as new supplies from shale formations and weak industrial demand have kept prices at levels not seen since 2003. 2011 may be the first year where there is little weather premium seen in the fall contract months, which normally would see a price rise due to fears of a potential production shutdown should a tropical storm or hurricane reach the Gulf of Mexico. However, with increasing Gas production and importance seen in shale formations, such as the Marcellus, Barnett and Bakken formations, many traders are less fearful of a production outage in the Gulf, because they believe that output can be increased from these alternative production areas. Natty bulls do note that US Gas in storage levels are 2% below the 5-year average for this time period, but with industrial demand remaining weak, there is currently little fear of tight supplies going into the winter withdrawal season, which traditionally begins on November 1st. Current weather forecasts are mixed, with below normal temperatures seen in the Midwest and East Coast later this week, but a warmer temperature outlook in the 6 to 10-day forecasts. Any increase in heating or cooling demand could put a bid under Natural Gas prices if a prolonged period of above or below normal temperatures occurs, however current forecasts are not calling for any extended periods of extreme temperatures, which could make any weather rallies short-lived. The most recent Commitment of Traders report shows large non-commercial traders still hold aa large net-short position in Natural Gas totaling 171,695 contracts as of September 6th. Though a large short position, it is nowhere near the nearly 300,000 contract short positron seen back in the summer of 2008. Though it appears that there is little in the way of current fundaments to break the market out of its recent range, one does get the feeling that the current low volatility environment will not last, and traders should be prepared for when this sleeping giant reawakes!

Technical Notes

Looking at the daily chart for October Natural Gas, we notice that prices are butting up against the downtrend-line drawn from the June 9th highs. The past few tests of this trend-line have failed, with lower prices following shortly thereafter. Prices are now hovering on both sides of the 20-day moving average which is confusing the short-term trend. The 14-day RSI has moved into neutral territory, with a current reading of 49.33. The contract low of 3.780 should be strong support for the October contract, with resistance found at the recent high of 4.130 made on September 1st.

optionsXpress