Natural Gas as Volatile as Ever

After being declared one of the worst investments of the last few years, natural gas seemed to finally find its footing in 2012. The fossil fuel surged through the end of summer, marking a 70% jump in just a few short months, only to watch its price cool back down during August. From there, it has been nothing short of a roller coaster ride for this asset and its traders, as NG has been all over the place in the last two months [for more natural gas news and analysis subscribe to our free newsletter].

Over the past few weeks, it has not been uncommon to watch NG move by 3% or more in a single trading session, as yesterday saw losses fall just shy of the 5% mark. Though traders had been hoping for this energy source to begin to show a bit more reliability, natural gas seems to have fallen into a volatile rut along with the rest of the economy. As we enter the winter months, traders will be looking for cooler weather to spike NG demand, especially considering that we are exiting the warmest 12 month stretch in U.S. history.

In October alone, NG dipped by 3.5% over a week, then spiked up 7% over the next week, only to fall 5% in the following week, and that up and down trend has continued for the whole month. The commodity may see some added volatility come election week, as it is generally agreed that a Romney victory will have a greater impact on the NG industry than the same result from Obama [see also 25 Ways To Invest In Natural Gas].

Trading For NG Volatility

Below, we outline several options to help active traders take advantage of the recent choppy sessions from NG.

  • United States Natural Gas Fund (UNG): This trading instrument is perfect for short-term positions in natural gas, but its front-month roll strategy makes the medium to long term less than ideal. UNG has an extremely active options market and trades more than 10 million times per day.
  • E-TRACS Natural Gas Futures Contango ETN (GASZ): An excellent but often overlooked fund, GASZ employs a strategy that shorts near term contracts and holds long positions in maturities dated further out. This strategy allows it to take advantage of that contango that NG almost always exhibits [see also 3 ETFs For The Natural Gas Recovery].
  • 3x Long Natural Gas ETN (UGAZ)/3x Inverse Natural Gas ETN (DGAZ): Anyone looking to really put their money where their mouth is can use either of these two 3X leveraged products. Note that movements of 10% in a single day are relatively common. DGAZ jumped by 10.8% during yesterday’s session while its long counterpart, UGAZ, surrendered 11.5%.

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Disclosure: No positions at time of writing.

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