The weather in the US is unfolding in a tough winter. And according to the Farmers’ Almanac’s famous weather outlook, it’s going to be a cold one, with plenty of snow.
I know, this is nothing new, right? In fact the natural gas price started to climb better than a month a go. People would think that this train left the station and trade opportunities failed already. Maybe if one trades directional, but there are plenty of other ways to take a cut of this. True, one needs to dig deeper and things get's more complicated...
First opportunity is in the futures market. Look at the expiration months and you'll see that natural gas price are in backwardation. That means front month prices are more expensive than back month, implying that current demand is more stronger than supply. So, this is a way of approaching this.
Second opportunity and my favorite is in the natural gas ETF, UNG.
Implied volatility is at 84% and IV rank(the level of implied volatility relative to the levels it has been at in the past) is at 70%. That means that options are priced higher than normal, making a credit strategy a good choice.
One can take into consideration that UNG has a negative 0.15 correlation with SPY. Make it ideal as a portfolio diversification strategy.
Looking at the distribution of the option prices we can see that we have a fat tail because of the high IV rank and accordingly a credit strategy or a naked one is the right option strategy approach.
Using tastytrade platform, it's easy to see that we deal with an inverse skew. So, the price of the calls is richer than price of the puts.
Considering all this, my choice is gonna be a skewed strangle.
The option strikes one chooses and the delta of the strikes should be related directly with the amount of the risk he wants to take and how it fits in the portfolio.
I know, this is nothing new, right? In fact the natural gas price started to climb better than a month a go. People would think that this train left the station and trade opportunities failed already. Maybe if one trades directional, but there are plenty of other ways to take a cut of this. True, one needs to dig deeper and things get's more complicated...
First opportunity is in the futures market. Look at the expiration months and you'll see that natural gas price are in backwardation. That means front month prices are more expensive than back month, implying that current demand is more stronger than supply. So, this is a way of approaching this.
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| Natural Gas prices in futures market |
Second opportunity and my favorite is in the natural gas ETF, UNG.
Implied volatility is at 84% and IV rank(the level of implied volatility relative to the levels it has been at in the past) is at 70%. That means that options are priced higher than normal, making a credit strategy a good choice.
One can take into consideration that UNG has a negative 0.15 correlation with SPY. Make it ideal as a portfolio diversification strategy.
Looking at the distribution of the option prices we can see that we have a fat tail because of the high IV rank and accordingly a credit strategy or a naked one is the right option strategy approach.
Using tastytrade platform, it's easy to see that we deal with an inverse skew. So, the price of the calls is richer than price of the puts.
 |
| UNG's option strikes |
Considering all this, my choice is gonna be a skewed strangle.
The option strikes one chooses and the delta of the strikes should be related directly with the amount of the risk he wants to take and how it fits in the portfolio.
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