Springtime Income Opportunities in Natural Gas

Springtime Income Opportunities in Natural Gas
May

3

2017

Springtime Income Opportunities in Natural Gas

Seasonal Supply Build Sets up High Probability Plays for Call Sellers

In our February Trade Advisory, we outlined a case for higher natural gas prices into the spring.

This primarily based on the seasonal tendency for natural gas prices to rise as supplies worked towards a low at the end of winter.

Indeed, supplies did continue to decline through the spring – following typical seasonal norms. Since the low in February, Natural Gas prices have rallied over 20%.

Kudos to all who sold the puts.

But with May here and summer around the corner, prices will now be subject to the reverse of that seasonal phenomenon. This will present opportunities for option writers on the other side of this market.

Seasonal Fundamentals Reverse in May

After winter ends, distributors begin what is known as “injection season.” This means they begin adding or “injecting” supplies back into storage. Thus natural gas supplies often begin to build again as the milder weather of May finally arrives.

The result has historically often been a seasonal price decline into the summer months.

Why? Economics 101. As supplies again begin to rise, prices have historically tended to fall.

This tendency is illustrated clearly in the seasonal chart below:

Dec Natural Gas 5 yr Seasonal

Natural Gas prices have historically tended to decline into summer as inventories once again begin to build.(*This chart represents averages only. Past performance is not indicative of future results.)


2017 Natural Gas Fundamentals

At the time of this writing, supplies of natural gas stand at 2.061 trillion cubic feet (tcf). While this is still 16.8% below last year at this time, it remains 14.6% above the 5 year average. As supply levels appear to be following closely with seasonal norms, the Premium Sniper has every reason to expect supplies to begin building again this month, and thus corresponding price weakness into summer.

EIA Working Gas in Storage Current Yr vs Highs & Lowsorically, Natural Gas supplies have tended to start building in May, often pressuring prices. This year’s supply draws appear to be following seasonal norms.


Conclusion and Strategy

With seasonal supply lows likely now behind us, Natural Gas inventories should begin to build into the warmer summer months. Historically, this cyclical supply build has tended to be a bearish force on prices.

With outright supply at ample levels for this time of year and inventory levels appearing to follow a typical seasonal trajectory, selling calls far above current price levels appears to be a high probability income generator.

We’ll be positioning managed accounts in a variety of strikes and strategies to take advantage of what we expect will be steady to weaker natural gas prices into summer.

December 2017 Natural Gas

December 2017 Natural Gas


Selling the December Natural Gas 5.00 Call Option


Do it yourself traders can consider selling the December Natural Gas 5.00 calls for premiums of $700 or better. More conservative income seekers can wait to sell the December 5.50 calls on any price strength this month. Target premiums on these higher strikes would be $500 or better.

One of the prime advantages of selling commodities options is the ability to sell deep out of the money strikes. One can note that these calls represent distances of 39% and 53% out of the money – respectively.

Any serious commodity investor must consider following seasonal tendencies – especially in the energy markets. Playing the normal ebb and flow of the supply/demand cycle can be a solid way to build equity in an account.

For more information on managed option selling accounts with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery for a Free Investor Information Pack.

  1. Hans Kmoch Says:
    May 10, 2017 at 4:36 pm

    Hi, thank you for interesting article. Do you prefer to sell american options (ON) in natural gas market or european one (LNE)?
    Hans

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