This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

How to Trade a Rise in Natural Gas Prices

NEW YORK ( TheStreet) -- I am seeing a potential buying opportunity today in what has been one of the biggest dogs over the past couple of years: good old natural gas. Or as we in the industry like to call it: the widowmaker.

Bearish fundamentals have beaten this market to a pulp. After all, our supplies of natural gas are at extremely high levels, enough to sustain the country for quite some time.

Looking to this week's inventory report, supplies probably rose 37 billion to 39 billion cubic feet, which sounds like a lot, though the five-year average build has been about 60 billion cubic feet.

While I do think that this market may have some more near-term upside, I do not think we will see the "big pop" in nat gas prices a lot of analysts have been calling for until the gigantic production backlog is mopped up.

One way to gauge a commodity's bullishness or bearishness is simply to look at companies that produce that commodity. In this case, one can look at natural gas producers Chesapeake Energy (CHK), Devon Energy (DVN) or Encana (ECA). Looking at these charts, I do not see too much to get excited about at this point. When supply is absorbed, however, I think we will see these issues trending higher, and that could be a great clue to building a longer-term position in natural gas.

In the near term, nat gas has traded higher in the past four sessions after putting in a swing low at 2.61 a week ago. The market is trying to turn up on a weekly chart with both the 20- and 50-day exponential moving averages (EMA) going horizontally. Still, the market is trading above the 20. On the daily chart, the market is close to turning higher, with the market now trading above the 20-day EMA but currently below the 50.

I think a short term buy here on a pullback to the 20-day EMA is worth a shot because it is a clear-cut signal. If wrong, it will be seen right away, and therefore a tight stop may be used.

If you are bullish on nat gas over the next few days, here is one way to play some potential upside. As always, if futures are not your thing, feel free to contact me to discuss other ways and instruments (such as options) to structure a bullish position. This information is based on the most recent data as of today, Sept. 5.

Buy 1 October natural gas futures at 2.81 or better.

Place a protective stop at 2.76 good until cancelled.

Target 3.00 or higher.

Stop may be trailed based on an individual's risk tolerance and money management preferences.

Risk on trade: As stated above, $545 including a $45 R/T commission inclusive of all fees.

Profit potential: theoretically unlimited to the upside. If target stated above is reached, profit would be $1,855 after subtracting a $45 R/T commission inclusive of all fees.

A mini contract may be used. In that case, amounts would be one quarter of those stated above.

Please note: Futures and options trading is inherently risky and isn't suitable for all investors. Past performance isn't indicative of future results. Stop-loss orders meant to limit losses may not be effective because market conditions may make it impossible to execute such orders.

Matt Zeman is a trader at Kingsview Financial. He began his trading career as a runner in the grain pits at the Chicago Board of Trade before becoming an arbitrage clerk. Eventually he started trading equity options and stocks. Matt now is a full-time futures broker. He has been a frequent guest on CNBC, Fox and Bloomberg, and provides his views on the stock, bond and futures markets for financial media including Dow Jones, the L.A. Times and The Associated Press. Matt is a member of the Chicago Board of Trade, and carries series 3, 7 and 66 licenses.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,031.14 +43.63 0.26%
S&P 500 1,984.13 -1.41 -0.07%
NASDAQ 4,518.9020 -48.6960 -1.07%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters