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Natural Gas Options Explained
Natural Gas options are option contracts in which the underlying asset is a natural gas futures contract. The holder of a natural gas option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying natural gas futures at the strike price. This right will cease to exist when the option expire after market close on expiration date.
Natural Gas Option Exchanges
Natural Gas option contracts are available for trading at New York Mercantile Exchange (NYMEX).
NYMEX Natural Gas option prices are quoted in dollars and cents per mmBtu and their underlying futures are traded in lots of 10000 mmBtus of natural gas.
| Exchange & Product Name | Underlying Contract Size | Exercise Style | Option Price Quotes |
| NYMEX Natural Gas Options | 10000 mmBtu (Full Contract Specs) | American | Calls | Puts |
Call and Put Options
Options are divided into two classes - calls and puts. Natural Gas call options are purchased by traders who are bullish about natural gas prices. Traders who believe that natural gas prices will fall can buy natural gas put options instead.
Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.
Natural Gas Options vs. Natural Gas Futures
Compared to the outright purchase of the underlying natural gas futures, natural gas options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless.Additional Leverage
Compared to taking a position on the underlying natural gas futures outright, the buyer of a natural gas option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying natural gas futures.Limit Potential Losses
As natural gas options only grant the right but not the obligation to assume the underlying natural gas futures position, potential losses are limited to only the premium paid to purchase the option.
Flexibility
Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.
Time Decay
Options have a limited lifespan and are subjected to the effects of time decay. The value of a natural gas option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.
Related Articles
- Natural Gas Futures Basics
- Buying Natural Gas Futures to Profit from a Rise in Natural Gas Prices
- Selling Natural Gas Futures to Profit from a Fall in Natural Gas Prices
- Natural Gas Call Option Trading Basics
- Natural Gas Put Option Trading Basics
- Hedging Against Rising Natural Gas Prices with Natural Gas Futures
- Hedging Against Falling Natural Gas Prices with Natural Gas Futures
How to Start Trading Natural Gas Options
To buy or sell natural gas options, you need to open a trading account with a broker that handles futures options trades. Most online options brokerages out there only deal with stock options and only a few such as optionsXpress lets you trade BOTH stock and futures options. optionsXpress also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.
