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How To Short Natural Gas and Profit


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An Overview Regarding How To Short Natural Gas and Profit

Short Natural Gas For Selloff
With natural gas hitting five-year highs above $5.75 per million British thermal units (MMBtu), many traders are asking how to short natural gas and profit.  There are a number of ways to short natural gas and profit from a future decrease in natural gas futures prices.  Not all of the natural gas short plays have the same amount of risk; and therefore, traders looking to profit from a decline in natural gas futures prices need to understand the different ways to go short natural gas.  To fully understand the risk and rewards associated with shorting natural gas, traders also need to understand that there is more to changes in natural gas prices than simply seasonal changes in temperatures.

What To Consider When Shorting Natural Gas

Short Natural GasNatural gas price action is often strongly affected by seasonal natural gas trading patterns that provide two opportunities to short and profit from drops in natural gas prices.  The two seasonal opportunities for making money on natural gas on the short side are the spring and fall shoulder seasons.  The spring shoulder season takes hold at some point during the middle of winter to the middle of spring, as demand for natural gas lessens and the natural gas injection season takes over.  The fall shoulder season takes hold at some point during late summer or early fall, as demand for natural gas lessens after summer heat wanes and the natural gas injection season is in full swing.

It is important to understand that shorting natural gas ahead of either of the two shoulder seasons is not a slam dunk profitable trading opportunity.  Abnormal weather patterns, natural gas demand, and natural gas storage levels can affect the onset and outcome of the shoulder seasons.  For example, the winter of 2012/2013 was not abnormally cold, and by the end of February natural gas stood at a price in the $3.90 MMBtu area, which is not elevated by any means and did not provide a good shorting opportunity.  March and April 2013 were abnormally cold months, one of the coldest first halfs of spring on record for many parts of the eastern two-thirds of the United States.  This caused natural gas futures prices to increase approximately 18% to the $4.60 MMBtu area by the end of April 2013, a time when natural gas is typically descending in price due to seasonal factors.  Warm weather finally arrived in May 2013, and natural gas prices responded by dropping back to the $3.70 MMBtu area by the middle of summer.  While money could be made shorting natural gas during the 2013 spring shoulder season, the onset was delayed by two months, which required a multiple-month trading commitment to make money shorting natural gas.

For the 2014 spring shoulder season, the concern is both natural gas storage levels and the possibility that the very cold winter weather will last into the early spring.  The winter of 2013/2014 has been the coldest winter in twenty years for the eastern two-thirds of the United States.  This has caused natural gas storage levels to drop quickly, as two record storage withdrawals were recorded during the 2013/2014 winter.  Natural gas prices responded by shooting above $5.00 MMBtu during February 2014, with a peak in the neighborhood of $5.75 MMBtu.  While this seemingly provides a good opportunity to profit from natural gas by shorting it going into the spring shoulder season, caution is advised.  With weeks of winter left and only tepid signs that the cold wave is abating, additional large natural gas storage withdrawals could cause natural storage levels to fall to such an extent that market participants worry about whether enough natural gas will be available for the following winter season.  This, along with any cooler than normal early spring weather that may materialize, could cause natural gas prices to increase in the early part of the spring shoulder season, and could create a short-squeeze that sends natural gas prices much higher.  Conversely, if warm weather arrives sooner than expected and the spring season comes with normal warm weather temperatures, then demand for natural gas will decline, and the price of natural gas should fall, creating an excellent opportunity to short natural gas and profit, as the price of natural gas falls.

The Different Ways To Short Natural Gas and Profit

There are several different ways to short natural gas and profit.  The purest way to short natural gas is by buying put options on natural gas futures contracts.  This provides direct exposure to natural gas price changes.  If natural gas futures contracts fall in price, put options will increase in price.  For traders that do not engage in buying put options, they can establish a short position in natural gas by either shorting long-oriented natural gas futures Exchange Traded Funds (ETFs) or by buying short-oriented natural gas futures ETFs.  These ETFs come in a variety forms, with exposure on the long and short side at one to three times the movement of natural gas futures.
Short Natural Gas and Profit

The advantage of going short natural gas by shorting long-oriented natural gas futures ETFs is that ETFs that derive their value from futures contracts often experience price decay over time, as they have to continuously replace their positions in futures contracts as the front-month contracts expire, which can cause them to lose small amounts of money each time they have to roll over into a new front-month futures contract.  Shorting long-oriented natural gas futures ETFs takes advantage of this price decay by increasing the downside potential verses short-oriented natural gas futures ETFs.  However, it can be difficult to find long-oriented natural gas futures ETFs shares to short, and if the trade goes in the opposite direction as anticipated, a trader may be hit with a margin call, as the long-oriented natural gas futures ETFs increase in value.

The advantage of going short natural gas by buying short-oriented natural gas futures ETFs is that they are easy to buy.

The following is a list of long-oriented natural gas futures ETFs that can be shorted to profit from a decrease in the price of natural gas futures contracts.

  • 1X Natural Gas Long ETF:  United States Natural Gas (NYSE:  UNG) is a one times (1X) long natural gas ETF.
  • 2X Natural Gas Long ETF:  ProShares Ultra DJ-UBS Natural Gas (NYSE:  BOIL) is a two times (2X) long natural gas ETF.
  • 3X Natural Gas Long ETF:  VelocityShares 3x Long Natural Gas ETN (NYSE:  UGAZ) is a three times (3X) long natural gas ETF.

The following is a list of short-oriented natural gas futures ETFs that can be purchased to profit from a decrease in the price of natural gas futures contracts.

  • 2X Natural Gas Short ETF:  Horizons BetaPro NYMEX Natural Gas Bear Plus ETF (OTC Pink:  HBNND) is a two times (2X) short natural gas ETF.
  • 2X Natural Gas Short ETF:  ProShares UltraShort DJ-UBS Natural Gas Fund (NYSE:  KOLD) is a two times (2X) short natural gas ETF
  • 3X Natural Gas Short ETF:  VelocityShares 3x Long Natural Gas ETN (NYSE:  DGAZ) is a three times (3X) short natural gas ETF.

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