Natural Gas: Bargain Hunting
Matthew Bradbard | Jun 14, 2013 12:55PM ET
September natural gas futures are lower by 13.1% in the last three weeks and lower by 15.9% from their highs made on 5/1. As it stands, futures are just under their 61.8% Fibonacci level (lower white jagged line) and attempting to trade back above the eight-day MA (orange line). Stochastics indicate an oversold market and though timing a reversal can be difficult aggressive traders can probe bullish trade in my opinion.
The Play
Clients are gaining bullish exposure via September futures and selling out of the money calls 1:1 in case prices work lower before we see a rebound. My suggestion is to collect 15-20 cents on your hedge, which presently would dictate you’re selling $3.80/3.90 strikes in September. The delta is approximately 50% which means you have a slight cushion and will make on the upside if my assessment is correct a nickel for every dime advance net/net. A return to the 38.2% Fib level lifts this contract to $4.07 or 28 cents from current trade...that is my objective in the coming weeks.
So why natural gas, and why now?
- The idea is to buy low and sell high and after the correction in the past 60 days we are getting long near four month lows.
- Natural gas appears to be the bastard child in the energy complex of late as traders are focusing on Crude oil and the products. Being a contrarian I want to buy when a commodity is not in the spotlight…identifying out of favor commodities is my MO.
- Based on the most recent EIA natural gas storage report inventories are 2.4% below their five-yr. average…supply/demand.
- The price consolidation in recent sessions has been on increased volume/buying interest which leads me to conclude that on confirmation of an interim low we could experience short covering just above current trade. .
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