The arrival of cooler weather and my biggest trading loser(s) of the year have a lot in common - both are things I prefer to avoid thinking about.

At least with my trading loser(s) I know that I can learn something from the experience, and try to apply that knowledge to future decision-making.

In that spirit, I'm embracing the fact that Fall is upon us, and highlighting today on the blog a well-known "winter" trade.

Natural gas is one of the "benchmark" energy futures that most market participants follow, along with crude oil. It also tends to be one of the highest volume futures contracts to trade hands on a given day - often falling within the top 10 highest volume contracts of any futures product.

And because natural gas is so integral in heating homes throughout the United States (and the rest of the world), the approach of winter usually represents the start of a more volatile trading period for this well-known commodity.

With November looming on the calendar, the team on Closing the Gap: Futures Edition decided to put natural gas trading under the microscope. Natural gas has also been rallying recently, which makes this examination even more timely.

As you can see in the image below (taken from the show), natural gas volatility tends to pick up during the winter months - December, January, and February:

Natural Gas In Play

One reason for the volatility highlighted above is related to the fact that the relative "harshness" of winter varies from year to year. When winter is "unseasonably warm," natural gas tends to under-perform. And when it's colder than expected, natural gas tends to outperform.

This is a function of supply and demand - colder weather means more natural gas is required to heat homes. On the other side of that equation is supply -  which has been growing in recent years.

As most are already aware, the United States has been ramping up the production of crude oil and natural gas in the last decade due to growth in some of the country's best-known shale reserves. New technology and innovative drilling approaches have unlocked crude oil and natural gas reserves which were previously thought to be nonviable.

Taking all of these factors together provides context on the current shape of the natural gas term structure - meaning the price of natural gas across the futures timeline. As of now, we see a price increase expected during winter, followed by a drop-off through Spring and Summer 2019.

Given how demand and supply works in relation to natural gas, this may fit our outlook on the commodity. A rise in prices along with increased demand this winter, followed by a drop in prices when Spring hits - which may also be linked to continuing forecasts for growth in natural gas production (i.e. robust supply).

Where things get interesting in natural gas is the points in time when forecasts change. A warmer winter, or an unexpected disruption in natural gas production, are a couple of examples.

In order to prepare for the uptick in natural gas volatility, you might consider adding this commodity to your watchlist. Likewise, you can watch recent tastytrade programming related to natural gas to prepare yourself for potential opportunities.

On the aforementioned episode of Closing the Gap, the hosts outline sample trades that are bearish and bullish - which may be helpful depending on your outlook.

If you are a frequent trader of crude oil, you can also use natural gas futures as a potential "pair" with your crude position(s). More information on crude oil and natural gas pairs can be found in this previous post "Futures Pairs: Crude Oil vs. Natural Gas.

For more information on natural gas futures, we also recommend these episodes:

If you have any questions about trading natural gas, or any other futures product, we hope you'll leave a message in the space below, or find us on Twitter at @tastytrade, or just send us an email to support@tastytrade.com!

We look forward to hearing from you!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


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