TRADE ALERT: Natural Gas Seasonal Move Now Appears Underway

TRADE ALERT: Natural Gas Seasonal Move Now Appears Underway
Oct

28

2016

TRADE ALERT: Natural Gas Seasonal Move Now Appears Underway

Still Opportunities for Call Sellers

In your October Option Seller Newsletter, you saw how the seasonal tendency for lower natural gas prices in October could produce some exceptional call selling opportunities. In the piece (starting on page 6), we suggested selling the March Natural Gas 5.50 call options for premiums of $600 each. (If you did not receive your copy of the October edition, you can download it here.) Our fundamental research suggested that with supplies at 3.499 trillion cubic feet (a record) and a strong seasonal tendency for prices to move lower in the autumn months, call sales were high probability trades.

January Natural Gas 26 Year Seasonal 

Natural gas 26 yr seasonal

  Natural Gas prices have historically tended to decline during mid to late autumn.
It now appears that the seasonal price move is well underway with Natural Gas prices tumbling over 19% in just the last two weeks.

Natural Gas (daily continuation)

Natural Gas Graph

Natural Gas prices have tumbled over 19% in just the past 2 weeks.

Cause and Effect

Mainstream media has the price dive attributed to “warmer weather.” Really? Its OCTOBER folks. Winter isn’t here yet. The real reason natural gas prices are declining is the normal, seasonally fundamental factors that occur about this time each year. As we described last month:

Natural Gas demand does indeed begin to climb in the fall – but at the retail level. What novice gas traders fail to understand is that it is most often commercial demand that drives futures prices. In natural gas, commercial demand tends to peak in early autumn and fall off into the end of the year. Prices have historically tended to follow. This time of year can present opportunities for fundamentally inclined investors.

Thus, it is commercial demand that tends to drive the futures price – not retail demand. The sharp drop in prices signals that commercials now feel that inventory levels have reached a point that is adequate to meet winter demand. With prices at inflated levels, commercials began hedging (ie: locking in this high price for their gas) which means selling in the futures market. The wave of selling hits stops forcing speculators to liquidate. This can accelerate the speed of the decline (as it appears to have done.) And if one compares the current price chart to the seasonal pattern, it all appears to be happening right on schedule.* While a warm October and forecast for warmer November may have helped to speed up this process, we do not believe it is the underlying cause. The deep study of core fundamentals of a commodity is what best identifies cause.

Conclusion and Strategy

While there are no guarantees that prices will continue on their current trajectory, it is our opinion that both fundamentals and seasonals do not favor higher prices. Thus, if you missed the first round, there could still be call selling opportunities here. The March 5.50 calls are currently valued at $350 and thus, too low a premium for us to consider for adding to a position. However, the speed of the price decline would suggest that a “dead cat bounce” could be in the cards at some point over the next month. While we do suggest working with a professional if selling options in commodities, those going it alone can consider selling the March 5.00 call at premiums of $700 or better – on such a bounce. Have a great month of premium collection.
*Note: Past performance is not indicative of future results. Seasonal averages are just that. There are no guarantees that just because price has performed a certain way in the past, it will perform that same way in the future.
For more information on managed commodity option selling portfolios with James Cordier and OptionSellers.com visit www.OptionSellers.com/Discovery to get a Free Investor Discovery Pack (Recommended Investment US $1 MM). James Cordier is founder and head trader of OptionSellers.com, a US based wealth management firm specializing exclusively in option writing portfolios for high net worth investors. He is author of McGraw-Hill’s The Complete Guide to Option Selling, 1st, 2nd and 3rd editions. James’ insights on commodities and option writing have been featured by CNBC, Fox Business News, The Wall Street Journal, Barrons, Forbes and Morningstar Advisors. Option Sellers, the documentary featuring James’s firm and their unique, uncorrelated approach to investing, recently aired on both Fox Business News and Bloomberg Television. Applications for his private client group are available on a limited monthly basis.

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