Why Pros Aren’t Fading Natural Gas Yet

Key Concepts

• Mean Reverting Asset: An asset whose price tends to revert to its average price over time.
• Fading a Move: Taking a position against the current price trend, betting it will reverse.
• M&G (Mini Natural Gas Futures Contract): A smaller-sized natural gas futures contract traded on the NYMEX.
• Broken Wing Butterfly: An options strategy designed to profit from limited price movement, typically used when expecting a range-bound market. Specifically, a downside broken wing butterfly profits if the underlying asset price stays above a certain level.
• Upside Broken Wing Butterfly: An options strategy similar to a broken wing butterfly, but structured to profit from limited price movement on the upside.
• Credit Spread: An options strategy where a net credit is received when the trade is initiated.
• Momentum: The tendency of an asset's price to continue moving in the same direction.

Natural Gas Trading Discussion: Avoiding Fades & Recognizing Momentum

The discussion centers around the current price action of natural gas and whether it’s an opportune time to “fade the move” – i.e., bet against the recent upward price surge. Stephen Edward initially suggests a cautious approach to fading, proposing a small position like selling one M&G contract. However, he quickly qualifies this, suggesting an upside broken wing butterfly as a potentially preferable strategy, aiming to take a credit. This is due to the inherent risk of natural gas experiencing extended runs when it begins to move. He notes that with three in chain (referring to the number of contracts or options available), there appears to be significant potential for further price increases.

Assessment of Current Price Action & Hesitation to Fade

The conversation quickly pivots to a shared reluctance to fade the natural gas move. A visual reference to the recent price chart is made, highlighting the substantial and rapid increase in price. The speaker points out that the current price has already returned to the level where a downside broken wing butterfly was previously implemented, suggesting that fading now would be premature. A specific price point of “five” is mentioned as a potential trigger for considering a fade, but even then, it’s presented as a tentative idea.

The Risk of Continued Upside & Momentum

A core argument presented is the danger of underestimating the potential for continued upward momentum in natural gas. The speakers emphasize that price movements aren’t always simple reversals. Instead, they can consist of a series of consecutive upward moves ("up move up move up"). This observation is supported by the recent price action, which demonstrates a sustained and significant rally.

As stated, “many of these…you get a move and they build momentum and it’s not just like one up move and then it comes back down. You can have up move up move up.” This highlights the difficulty in predicting a top and the risk associated with assuming a reversal will occur quickly.

Preference for Preserving Upside Potential

One speaker explicitly states a preference for not losing out on potential further gains. They articulate difficulty in being comfortable with a strategy that limits upside participation. This suggests a bias towards bullish sentiment or a desire to capitalize on continued price increases.

Strategic Considerations: Broken Wing Butterflies

The discussion briefly touches on the use of broken wing butterflies. While initially suggesting a downside broken wing butterfly was previously used, the conversation leans towards considering an upside broken wing butterfly. This strategy, when executed for a credit, profits from limited price movement above the strike prices chosen. This aligns with the overall sentiment of caution regarding fading and a preference for benefiting from continued, albeit potentially capped, upside.

Conclusion

The primary takeaway is a strong reluctance to fade the current natural gas move due to the observed momentum and the potential for further price increases. The speakers favor strategies that allow for participation in potential upside while acknowledging the inherent volatility of natural gas. The discussion underscores the importance of recognizing momentum in trading and avoiding premature assumptions about reversals.