Natural gas has been the laggard in the energy complex so far this season. Since the Katrina highs last year, natural gas has corrected almost all the way to the pre hurricane lows from last year. We are now getting into the summer cooling season where we are all tuning on our air conditioners. This causes a normal seasonal spike in demand. Couple the normal seasonal pattern with the predictions about this hurricane season being as rough as last year and you have the makings of a bull market in natural gas.
Buy one August 2006 Natural Gas 7.00 call, also buy one August 2006 Natural Gas 8.00call, while selling two August 2006 Natural Gas 7.50 calls, for a combined cost and risk of 60 points ($600) or less to open a position.
Click the chart to enlarge
Max profit assuming a 60 point fill is 440 points ($4400) giving this trade better than a 7:1 risk reward ratio. Max profit occurs at expiration with the Natural Gas trading at 7.50. The trade is profitable at expiration if Natural Gas is trading any where between 7.06 and 7.94 (break even points) which means we have a band of 880 points that we can profit in!
Max risk assuming a 60 point fill is $600. This occurs at expiration with Natural Gas trading below 7.00 or above 8.00.
Note: Derek Frey, head trader for Odom & Frey Futures & Options, will be holding an expert webinar with Edward Ponsi, fx educator for Fxstreet, and Tony Juste, foriegn exchange advisor to Fxstreet. The topic is Forex. This will be a voice webinar. The session will be Wed June 21 – Fri June 23, 2006. Starting every day at 13:00 GMT/10:00 am EST, and will last for approximately 4 hours.Click here to register for this webinar.
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Resource Investor published an interesting article about Natural Gas yesterday that supports Derek’s thinking. See http://www.resourceinvestor.com/pebble.asp?relid=20714