Natural Gas Trading Strategies

by Carmelo Montalbano ; Updated July 27, 2017
Buy strengths and sell weaknesses

Natural gas trading strategies are determined by two forces: the securities used to trade natural gas and the seasonal and long-term trends that create varying prices in the marketplace. Natural gas strategies trade with regard to the value of other energy products as well. Each strategy offers profit opportunities as long as proper risk management and protective stops are employed.

Natural Gas Trading Opportunities

Natural gas can be traded in the futures market as a commodity. Using the futures markets provides great leverage, especially when used to trade major trends. Natural gas can also be traded as an exchange-traded fund, which is a stock that owns only natural gas companies. Individual companies can also be purchased both as a long-term provider of natural gas and for the transmission of natural gas through a pipeline strategy. These stocks often pay handsome dividends and are an income play.

Investors can also invest in the exploration of natural gas. Stocks are valued according to the expected sales of the inventory of natural gas they control. All of these possibilities are found in the investment arena. Natural gas is usually traded using one of three strategies: the relative value of natural gas to oil and other energy products; the seasonal demand for natural gas in the winter months; and the long term price of energy stocks--especially the strategic value of natural gas, which is clean and abundant in the United States

Seasonal Strategies

Natural gas strategies for seasonal products is a standard futures and options trade. Traders anticipate, from weather reports and climatologists, the expected weather patterns, especially during the high demand winter months. Because the trade is seasonal, traders tend to use futures, options on futures and options on stocks to leverage the value of the trade. As a result, option premiums tend to move to extreme values and then rapidly decline as the market anticipates warming trends. Traders also trade natural gas depending on the level of economic activity. Demand slumps during economic downturns, dropping prices but with the anticipation of economic recovery. For these trades, investors usually buy stocks of natural gas transmission entities and exploration companies because the demand and value of their inventories are worth more.

Long-Term Strategies

In recent years, natural gas traded in line with the large run-up in crude oil. These are profitable strategies because at certain prices large institutional clients, such as businesses and energy producers, move energy production from oil to gas. The measure of energy, British thermal units, or BTUs, are different for every energy source. Consumers use the lowest price of energy available. This substitution effect keeps the relative value of oil, gas, nuclear and alternative energies in a narrow grid of price relationships. Given the important strategic availability of natural gas, particularly in the United States, natural gas may well become the beneficiary of tax and legislative action, thus effectively raising its value.

Natural Gas-Leveraged Trading Strategies

Natural gas futures and options are often traded like other commodities with respect to price discrepancies involving the near and longer term expiration dates. Option strategies involving covered calls can be used to produce income with minimal risk. Natural gas is also traded in a variety of strategies to produce gains if price rises, falls and trends in a narrow range.

About the Author

After an 18-year career on Wall Street as a trader of municipal and mortgage backed securities, Carmelo Montalbano developed a very large desktop trading application that managed more than 30 institutional portfolios. Technology and small business acquisitions continue to be his primary interest.