Treasure Chest | Oct 27 2011
By Jay Richards
What?
Just Spreads suggests selling the December 11 / (buying) March 12 calendar spread in Natural Gas as North America goes into its winter period. This spread trade has been profitable 14 of the last 15 years when entered in early October and exited in early November.
Why?
History tends to repeat itself and seasonal statistics are a key benefit to trading commodities. In this case being short the front month (December) and long the deferred month (March) represents the increased demand and price for the deferred month of March relative to the December contract.
Background
Natural gas accounts for 25% of total U.S. energy and is one of the most important economic commodities in the U.S. after crude oil. Its market share will most likely increase because of the favourable competitive position of gas in relation to other fuels and the tightening environmental standards for fuel combustion.
The natural gas has a strong seasonal tendency to bottom in July and then peak in December. As part of this seasonal tendency are the seasonal spread patterns that develop within this period. Such is the case for selling December 11 and buying March 2012. This particular spread has had 93% consistency for the price of March 2012 natural gas to outpace the price of December i.e. to see the price of March 2012 rise over the price of December 2011 around the same period every year.
This is where a spread trader (active investor) seeks a trading opportunity to profit from the price variation between two identical contracts i.e. natural gas, but with different expiry times i.e. December and March 2012. The spread trader does not necessarily need to be bullish or bearish natural gas, instead they will take a view on whether their price relationship will either widen or narrow. This price relationship is referred to as the spread price.
Two key benefits of using a spread compared to an outright (long) natural gas position is lower margins and reduced volatility. The margin for a natural gas is $3,300 USD and the spread is $675 USD. The reduced volatility (by as much as 80%) can allow a position to be maintained longer and smooths over some of the erratic nature to that of an outright position.
Below is a spread chart of the December 2011 / March 2012 natural gas. The seasonal suggests that this spread price should widen or go lower from -111 as we move into November:
Just Spreads specializes in providing low-risk and low-margin spread trade opportunities across a select group of US and Australian futures markets. Just Spreads’ offers a dynamic service dedicated to providing spread trade opportunities, daily market updates and continuing education over a select group of US and Australian based futures spreads. All essential elements are provided so you, the subscriber can choose the trade that’s within your comfort zone, take control of your trade management and learn to spread trade. To learn more please visit www.justspreads.com.au. Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
Just Spreads is a registered site with the New South Wales Office of Fair Trading, Registration Number: BN98515051; Proprietor: JHR Trading Pty. Ltd. ACN: 140 125 793. Jay Richards holds a Diploma of Financial Services (FNS51004) from the Australian Financial Markets Association (AFMA) for the Generic and Specialist “Derivatives” knowledge and skills components of ASIC Regulatory Guide 146. Just Spreads is a Corporate Authorized Representative (No 403237) of Aliom Pty Ltd ACN 123 876 291, AFSL 323182 issued by the Australian Securities and Investments Commission (ASIC).
