Since putting in a low on 8/8 at $3.15 October natural gas futures have advanced 11% lifting this contract to the down sloping trend line(blue line) that has served as resistance since mid-May. It was a positive development in recent sessions to trade above both the 8 and 18 day MAs. Above the trend line my next upside objective is the 50 day MA (green line) which comes in around the same level as the gap that was formed on 7/26. Outside of technical reasons for the appreciation that likely includes short covering let’s address some fundamentals. Hotter temperatures in the Midwest and Plain states are raising demand expectations. Warmer temperatures in the coming weeks means more homes and businesses use air conditioning powered by gas-fired electricity…raising demand. (BULLISH). A pair of storms that had the potential to develop into hurricanes weakened to tropical depressions (BEARISH). Natural gas traders will continue to pay close attention to tropical storm activity in the gulf as it is hurricane season.
Where from here?
I am looking for higher trade yet and have advised bullish traders already positioned to stay the course. Upside objectives in this contract is as follows, first the gap from 7/26 at $3.57, followed by the 50 day MA at $3.62, and finally the 38.2% Fibonacci retracement level at $3.72. At this juncture I’m suggesting two bullish strategies:
Back ratio spreads in both October and November, selling (1) at the money call and buying multiple (3 or 4) out of the money calls. Looking to spend under $1,000 in premium for the entire package.
Also I like the idea of long futures with some sort of options leg for protection. Assuming you are trading October futures you could sell a $3.50 or $3.60 call or buy a $3.50 or $3.40 put. The idea is to make more money on the futures leg than you lose on the options leg. My suggestion is if you offset the futures at a profit or loss lift the options at the same time so the hedge does not turn into its own trade.
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