Seasonal Strategies: Trading Natural Gas with a Tactical Edge1. Introduction
Natural Gas Futures (NG1! and MNG1!) hold a significant place in the energy market, acting as a key barometer for both seasonal and macroeconomic trends. These futures contracts are not just tools for hedging energy prices but also present potentially lucrative opportunities for traders who understand the underlying seasonal patterns that influence their movement.
Seasonality is a powerful concept in trading, particularly in commodities like Natural Gas, where demand and supply fluctuations are often tied to predictable seasonal factors.
2. Understanding Seasonality in Natural Gas
Seasonality refers to the predictable changes in price and market behavior that occur at specific times of the year. In the context of commodities like Natural Gas, seasonality is particularly significant due to the cyclical nature of energy consumption and production. Factors such as weather patterns, heating demand in winter, cooling demand in summer, and storage levels contribute to the seasonal price movements observed in Natural Gas Futures.
For this analysis, daily data from November 14, 1995, to August 30, 2024, has been meticulously examined. By calculating the 21-day moving average (representing a month) and the 63-day moving average (representing a quarter), bullish and bearish crossovers have been identified.
3. Analyzing Bullish and Bearish Crossovers
Bullish and bearish crossovers are critical signals in technical analysis, representing points where momentum shifts from one direction to another. In our analysis of Natural Gas Futures, such crossovers provide a clear indication of the monthly and quarterly trends.
The data reveals distinct patterns in the frequency and magnitude of bullish and bearish crossovers across different months:
Bullish Crossovers: Certain months, particularly March, April, and September, show a high number of bullish crossovers. This suggests that these months are historically strong for upward price movements, offering potential buying opportunities.
Bearish Crossovers: On the other hand, months like May, June, October, and November are marked by a higher frequency of bearish crossovers. These periods have historically seen downward price pressure, which could present short-selling opportunities.
The below chart further illustrates these patterns, highlighting the months with the most significant bullish and bearish activity.
4. Key Seasonal Patterns in Natural Gas
The analysis of Natural Gas Futures reveals distinct seasonal patterns that vary significantly from month to month. By understanding these patterns, traders can strategically plan to time their trades by aligning with the most opportune periods for either bullish or bearish movements.
January to February: Mixed Signals
Historically showing a balanced number of bullish and bearish crossovers. This suggests that while there are opportunities for both long and short trades, caution is warranted as the market can be unpredictable during this period.
March to April: Bullish Momentum
We see a shift towards more bullish activity. While there is still some bearish potential, the overall trend favors upward movements. Traders might consider looking for long opportunities during this period.
May to June: Bearish Pressure
The market shows signs of bearish pressure indicating a potential shift in momentum.
July, August and September: Summer Bulls
July and August: The bullish trend tends to be back but with a higher degree of volatility which may involve sudden market reversals.
September: Showing frequent up-moves with strong percentages. This month offers opportunities for traders to re-enter the market on the long side.
October to December: Volatile and Bearish
Bearish momentum and strong down-moves opening the door to shorting opportunities. Traders should be especially cautious in December with very high volatility in both directions.
These seasonal patterns provide a roadmap for traders, highlighting the months that are historically more favorable for either long or short positions in Natural Gas Futures.
5. September Seasonality Analysis: A Potential Buying Opportunity
September has historically been one of the most bullish months for Natural Gas Futures. Despite the common perception that autumn marks a period of declining demand for natural gas as the summer cooling season ends, the data reveals a different story.
Current Market Opportunity
Current Price: With the continuous contract of Natural Gas Futures (NG1!) currently trading around 2.18, the historical trends suggest that this could be a valid entry point for traders looking to capitalize on a potential price rally.
Historical Patterns: September has witnessed some of the most robust bullish activity, with the data showing a clear pattern of price increases. On average, September has seen up-moves of 36.45%, making it a standout month for bullish opportunities.
Trade Setup
Entry Point: Entering the market around the current price on NG1! of 2.18.
Target Price: Based on the historical average up-move of 36.45%, traders could set a target price around 2.98.
Stop Loss: To manage risk, a stop loss could be placed 11.28% below the entry price, around 1.93.
Probability of Success: Historical data suggests a high probability for this trade where 11 out of 13 trades produced bullish moves.
Conservative Approach
For traders seeking a more conservative strategy, setting a target at the UFO resistance level of 2.673 (instead of 2.98) offers a more cautious approach.
6. Trading with a Tactical Edge: Risk-Reward Analysis
The risk-reward ratio compares the potential profit of a trade to the potential loss. In our September example:
Risk: The stop loss is placed 11.28% below the entry price at 1.93, limiting potential downside.
Reward: The target is 36.45% above the entry price at approximately 2.98.
This setup offers a risk-reward ratio of about 1:3.2, meaning that for every point of risk, the potential reward is 3.20 points. Such a ratio is generally considered favorable in trading, as it allows for a greater margin of error while still maintaining profitability over time.
Point Values for Natural Gas Futures
When trading Natural Gas futures, it is essential to understand the point value of the contracts. For standard Natural Gas futures (NG), each point of movement in the price is worth $10,000 per contract. This means that a move from 2.18 to 2.98 represents a potential gain of $8,000 per contract with a potential for risk of $2,500 per contract.
For Micro Natural Gas futures (MNG), the point value is one-tenth that of the standard contract, with each point of movement worth $1,000 per contract. Therefore, the for same trade plan, the potential for reward and risk per contract would be $800 and $250 respectively.
7. Discipline and Emotional Control
Successful risk management also requires discipline and emotional control. It's essential to stick to your trading plan, avoid impulsive decisions, and manage your emotions, especially during periods of market volatility. Fear and greed are the enemies of successful trading, and maintaining a level-headed approach is crucial for long-term success.
8. Conclusion
The analysis of seasonality in Natural Gas Futures reveals a rich landscape of trading opportunities, especially when approached with a tactical mindset that incorporates probability and risk-reward analysis. By understanding the historical patterns that have shaped the market over the years, traders can position themselves to capitalize on the most opportune moments, whether the market is poised for a bullish rise or a bearish decline.
This September, in particular, presents a compelling case for a potential buying opportunity.
Ultimately, successful trading requires more than just identifying patterns—it demands a disciplined approach to risk management, a clear understanding of market dynamics, and the ability to adapt to changing conditions. By integrating these elements into your trading strategy, you can enhance your ability to navigate the complexities of the Natural Gas market and achieve consistent, long-term success.
As you apply these insights to your own trading, remember that while historical data provides valuable guidance, it is not a guarantee of future results. Always approach the market with caution, stay informed, and continuously refine your strategy based on the latest information and market conditions.
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com - This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
Commodityfutures
Options Blueprint Series: Leveraging Diagonals with Corn FuturesIntroduction to Corn Futures (CBOT)
Corn Futures, central to the commodities market, are traded on the Chicago Board of Trade (CBOT). These futures contracts are standardized agreements to buy or sell 5,000 bushels of corn, providing traders with a mechanism to hedge against price changes or to be exposed to future price movements in the agricultural sector.
Contract Specifications:
Contract Size: 5,000 bushels
Quotation: Cents per bushel
Minimum Tick Size: ¼ cent per bushel, equivalent to $12.50 per contract
Trading Hours: Sunday to Friday, electronic trading from 7:00 PM to 7:45 AM CT, and Monday to Friday, daytime trading from 8:30 AM to 1:20 PM CT
Contract Months: March, May, July, September, December, with additional serial months providing year-round trading opportunities
Margin Requirements: Margins are set by the exchange and can vary, with initial margins typically being a fraction of the contract value to secure a position ($1,300 at the time of this publication)
The liquidity and volume in Corn Futures make them an attractive market for traders. Factors influencing corn prices include weather patterns affecting crop yields, global supply and demand dynamics, and changes in energy prices due to corn's role in ethanol production.
Understanding Diagonal Spreads
Diagonal Spreads are a sophisticated options strategy that involves simultaneously buying and selling options of the same type (either calls or puts) with different strike prices and expiration dates. This approach is designed to leverage the time decay (theta) and volatility differences between contracts, making it particularly suitable for markets with expected directional moves and distinct volatility characteristics, like Corn Futures.
Key Components:
Long Leg: Involves buying an option with a longer expiration date. This option acts as the foundational position, typically chosen to be in-the-money (ITM) to capitalize on intrinsic value while also benefiting from time decay at a slower rate due to its longer duration.
Short Leg: Consists of selling an option with a shorter expiration date and a different strike price, usually out-of-the-money (OTM). This leg generates immediate income from the premium received, which helps offset the cost of the long leg.
Strategic Advantages:
Directional Flexibility: Diagonal spreads can be tailored to bullish or bearish outlooks depending on the selection of calls or puts, strikes and expirations.
Time Decay Harnessing: By selling a shorter-term option, the strategy aims to benefit from the rapid acceleration of time decay on the sold option, improving the position's overall theta.
Given the cyclical nature of the agricultural sector and the specific factors influencing corn prices, diagonal spreads offer a strategic method to trade Corn Futures options. They provide a balance between long-term market views and short-term income generation through premium collection on the short leg.
Application of Diagonal Spreads to Corn Futures
In applying Diagonal Spreads to Corn Futures, we focus on a bearish strategy to capitalize on an anticipated gap fill below the current price level. This strategic choice is driven by the analysis of Corn Futures' price action, indicating potential downward movement. A bearish diagonal spread can be particularly effective in such scenarios, offering the flexibility to benefit from both time decay and directional movement.
Bearish Diagonal Spread Setup:
Long Leg (Buy Put): Select a put option with a longer expiration date to serve as the foundation of your bearish position. Choose a strike price that is at-the-money or in-the-money (ATM/ITM) to ensure intrinsic value.
Short Leg (Sell Put): Sell a put option with a shorter expiration date at a lower strike price that is out-of-the-money (OTM).
Trade Example:
Assumption: Corn Futures are trading at 434 cents per bushel.
Long Put: Buy a 47-day put option with a strike price of 435 cents, paying a premium of 7.49 cents per bushel ($374.5 – point value =$50).
Short Put: Sell a 19-day put option with a strike price of 415 cents, receiving a premium of 1.01 cents per bushel ($50.5 – point value =$50).
As seen on the below screenshot, we are using the CME Options Calculator in order to generate fair value prices and Greeks for any options on futures contracts.
The goal is for Corn Futures to decline towards the 415-cent level (origin of the gap).
Risk Considerations: While diagonal spreads can offer controlled risk (premium paid = 6.48 = 7.49 – 1.01 = $324 – point value =$50) and strategic flexibility, it's crucial to be mindful of the potential for loss, particularly if the market moves sharply in an unintended direction. Employing risk management techniques can help mitigate these risks:
Adjustments and Rolls: Proactively manage the position by adjusting or rolling the short leg to a different strike price or expiration date in response to market movements or changes in volatility. This can help collect additional premium and potentially offset losses on the long leg.
Use of Stop Losses: Implement stop-loss orders based on predefined risk tolerance levels. This could be set as a percentage of the initial investment or based on the technical levels in Corn Futures prices.
Diversification: While not specific to the strategy, diversifying your portfolio beyond just Corn Futures options can help manage overall market risk. Different markets may react differently to the same economic indicators or geopolitical events, spreading your risk exposure.
Regular Monitoring: Given the dynamic nature of Corn Futures and the options market, regular monitoring is crucial. Stay informed about market conditions, news impacting agricultural commodities, and changes in volatility that could affect your position.
Diagonal spreads in Corn Futures offer a strategic avenue for traders looking to exploit market conditions and time decay with a defined risk profile. However, the key to successful implementation lies in diligent risk management, including making informed adjustments, employing diversification, and maintaining a disciplined approach to monitoring and exiting positions.
Conclusion
In this edition of the Options Blueprint Series, we explored the strategic application of Diagonal Spreads to Corn Futures traded on the Chicago Board of Trade (CBOT). This advanced options strategy offers traders a nuanced approach to potentially capitalize on market movements, leveraging the inherent time decay of options to enhance potential returns.
Employing Diagonal Spreads allows traders to express a directional bias—bearish, in our case study—while managing the investment's risk profile through a combination of long-term and short-term options. By buying a longer-dated, in-the-money put and selling a shorter-dated, out-of-the-money put, traders can set up a position that benefits from both the expected downward movement towards a gap fill and the accelerated time decay of the sold option.
However, as with any sophisticated trading strategy, understanding and managing the associated risks is paramount. Directional risks, volatility changes, and the potential for early assignment on the short leg require vigilant management and a readiness to adjust the position as market conditions evolve.
By adhering to disciplined risk management practices—such as making timely adjustments, employing stop losses, and maintaining portfolio diversification—traders can seek to navigate the complexities of the options market and aim for consistent, strategic gains.
The Corn Futures market, with its dynamic price movements influenced by a range of factors from weather to global supply and demand dynamics, provides a fertile ground for applying Diagonal Spreads. Traders who invest the time to understand both the underlying market and the intricacies of this options strategy may find themselves well-positioned to exploit opportunities that arise from market volatility.
In summary, Diagonal Spreads present a strategic option for traders looking to leverage market insights and options mechanics in pursuit of their trading objectives. As always, education and practice are key to mastering these techniques, with paper trading offering a risk-free way to hone one's skills before venturing into live markets.
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
SOYBEAN - IMMINENT SELL OFFSOYBEAN FUTURES - MONTHLY SUPPLY AND DEMAND ANALYSIS
Soybean sold at Monthly Supply Zone -> Destiny: Monthly Demand Zone
I suggest make the following probable trades:
- Sell Soybean until reach Monthly Demand zone
- Buy Soybean from Monthly Demand Zone until Monthly Supply Zone
Is it a good time to sell some SugarThe buying spree at 17/05 NY open didn't make the market move very much. Instead, it creates volatility in the Sugar market. Therefore, I believe the Bulls are just not there to defend the market and a breakout should occur soon.
Trailing Stops should be used when the price hits 16.62.
Is it time to buy the retest ?Price started to form a liquidity zone in last week's trading and we started to see a liquidity grab move with a minor engulfing pattern at the last hours of the Friday session.
Price hit the lower lows of the liquidity zone and then form an engulfing candle. We could buy the retest here with targets above 440.
Always follow your trading plan regarding entry, risk management, and trade management.
Good luck!
~ Tuan Anh Commo
Sugar Sweet !!!Just thought that we are not gonna have a chance with Sugar. But no we WANT SOME SUGAR right now because it has come back for us.
If you are an aggressive trader like you should be in this spot, MARKET.
If you want to have a better POSITION TRADER, two options for you:
17.70 - 17.80 is the first spot.
The next sweet spot is 17.27.
Always follow your trading plan regarding entry, risk management, and trade management.
Good luck!
~ Tuan Anh Commo
You cannot lose this Soybean Oil trade !!It is time to take a look into the weekly and monthly chart where a huge supply zone overlap.
We have a monthly supply zone at 51.5 - 57.1 and a weekly supply zone at 51.5 - 52.7 which overlap at 51.6 - 53.6. They are both original zone so the probability of this short trade is to the moon.
This is a very easy trade to take and I sure don't want to miss this chance.
Always follow your trading plan regarding entry, risk management, and trade management.
Good luck!
~ Tuan Anh Commo