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Natural Gas At 10-Year Low: One Way To Play Further Downside

December 16, 2015 3:50 pm
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Natural Gas At 10-Year Low: One Way To Play Further Downside
  • Gas is trading at its lowest level since 1999, driven by worries about weak demand.
  • At the New York Mercantile Exchange, the January Nymex price stood around $1.804 per million British thermal units (MMBtu) on Wednesday afternoon.
  • Is there further downside left? If so, how can investors profit from it?

Bull spreads might offer an interesting option.

What Are Bull Spreads?

Spreads "offer built-in floor and ceiling levels that define the lowest and highest points at which the trade can settle," Nadex explains. In other words, traders know how much they can gain or lose from the outset, thus limiting the risk.

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How To Trade Natural Gas With Bull Spreads

In the following example, the underlying natural gas futures market is trading around 1.9 and an investor decides to trade a daily Bull Spread.

This investor believes the price of natural gas will fall in the short-term, so he chooses a Daily Bull Spread that looks something like: Natural Gas 1.000-2.000 (2:30PM).

Since this investor believes the natural gas future will be below 1.9 at 2:30 p.m., he chooses to Sell the contact. Thus, he selects two contracts at the bid price of 1.9. "Each pip the price moves is worth $1 per point," Nadex explains. His Maximum Profit and Loss are displayed automatically. His trade's "floor" is 1.000 and his "ceiling" is 2.000.

He will then monitor the trade and, when his position expires at 2:30 p.m., the difference between Nadex's calculated expiration value and his opening price of 1.9 will determine his profit or loss.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

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