NYMEX
Natural Gas Futures and Options
Market Trading
Learn the most effective strategies for buying and selling
options on futures contracts. Also learn producer and consumer
hedging strategies.
*The information contained within this webpage comes from sources
believed to be reliable. No guarantees are being made to the
content's accuracy or completeness.
The History of the Natural Gas Futures Market Trading
Natural gas is a colorless,
shapeless and odorless fossil fuel in its pure form. It is a mixture of
hydrocarbon gases formed primarily of methane but it can also include butane,
ethane, propane and pentane. Around 500 B.C., the Chinese discovered that the
energy produced by igniting natural gas could be harnessed and used as a
desalinization tool. Ancient Chinese would use crude bamboo-shoot pipes to pass
the gas through and ignite it to boil sea water to create potable fresh water.
Around 1785, Britain became the first country to commercially use natural gas to
power street lights and indoor lights. In 1821, William Hart was the first man
to dig a well for the specific purpose of obtaining natural gas in the United
States and is considered the "father of natural gas" in America.
It is domestically produced and readily available to
end-users through the existing utility
infrastructure, natural gas has also become
increasingly popular as an alternative
transportation fuel.
Natural gas accounts for almost a quarter of United
States energy consumption, and the NYMEX Division
natural gas future contract is widely used as a
national benchmark price. Roughly 50% of the heating needs for the United States
are supplied by natural gas. The United States is considered the Saudi Arabia of
natural gas because of the huge supplies trapped in shale deposits and in the
Gulf of Mexico.
Natural Gas Futures and Options Quick Facts
-
10,000 mmBtu contract size
-
one cent move equals $100
-
trades all months
-
Natural gas futures symbol (NG)
Here is the energy products brochure courtesy of the CME
Group.
Energy Brochure
The natural gas futures contract
trades in units of 10,000 million British thermal
units (mmBtu). The natural gas futures price is based on delivery at the
Henry Hub in Louisiana. This concentration of pipelines serve markets throughout the U.S. East
Coast, the Gulf Coast,
the Midwest, and up to the Canadian border. Many savvy end users of natural gas
use natural gas futures and natural gas options to hedge their price risks
related to higher prices. Contact us for more
information about natural gas hedging strategies using natural gas futures and
natural gas future options.
During the September 11 terrorist attacks the NYMEX
was destroyed but within days the natural gas
futures and natural gas options markets were trading
again. This is a testament to the strength and
viability of the energy future markets. The natural gas futures markets are a
perfect example of the pure bastion of capitalism that the futures markets
represent.
There are many corporate uses for natural gas futures.
The spread between the natural gas future
contract and electricity future contract– the spark spread – is another natural
gas hedging procedure used
to manage natural gas futures price risk in the power markets and utility plants.
Natural gas is much more clean burning that products created from
crude oil such as heating
oil and unleaded gas making its use much
better for the environment.
Are you a
natural gas hedger?
If so,
click here to learn more.
Natural Gas Options on Futures Contracts
Explained
A natural gas call option gives
the purchaser the right but not the obligation to purchase the
underlying futures contract for a specific time period and a specific
price (strike price). Let's say that you wanted to purchase a
September natural gas $4 call option and pay a premium of $1,540.
This means that you bought the right but not the
obligation to buy 10,000 million British Thermal Units of natural
gas for $4.00 per 10,000 Btus. Of course, very few options are
bought for the purpose of taking delivery but that is one potential
outcome. Chances are that you either bought the natural gas option
to hedge your price risk in the physical natural gas market (maybe
you are a producer like a shale fracker or an end user like a power
plant) or you are speculating that natural gas prices will go higher
in an attempt to make a profit.
A natural gas put option gives
the purchaser the right but not the obligation to sell the
underlying futures contract for a specific time period and a specific
price. Let's say that you wanted to buy a September natural gas
$3.50 put option and pay a premium of $1,300.
This means that you have the right but not the
obligation to sell 10,000 million Btus of September natural gas at
$3.50.
What is the delta factor?
The delta factor of an option represents the
estimated percentage of change an option will receive based on the
movements in the underlying futures contract.
Let's assume the April $4 natural gas call
option above has a 30% delta factor. This means that if the
underlying futures contract were to rally by $1,000, then the call
option would accrue by approximately $300 or 30% of $1,000 in the
natural gas futures contract.
What is theta?
Options are wasting assets which means that they
lose value as time passes. The theta of an option is the measure of
time decay.
Let's assume that you bought an April natural
gas $4 call option with 60 days left until expiration. Let's also
assume that the natural gas futures prices have moved very little
over the last month and are exactly the same price 30 days later.
Your option will have lost 30 days worth of time and therefore will
be worth less today that it was when it had 60 days left until
expiration.
What is
vega?
Vega is a measure of the implied volatility of
an option contract as it relates to its underlying futures contract.
For instance, if the underlying futures contract is extremely
volatile then the implied volatility of the options of that futures
contract will be affected.
In a high implied volatility environment option
premiums tend to expand. Conversely, in a low implied volatility
environment the option premiums tend to decrease.
*Contract information changes from time to time. Please
click here to see the most recent
contract specifications and
click here for the most recent trading hours.
Contract Specifications
Henry Hub Natural Gas Future and Natural Gas Option Contract
Trading Unit
Futures: 10,000 million British thermal units
(mmBtu).
Options: One NYMEX Division natural gas future
contract.
Price Quotation
Natural Gas
Futures and Options: Dollars and cents per mmBtu,
for example, $2.850 per mmBtu.
Trading Hours
Natural Gas
Futures and Options: Open outcry trading is
conducted from 9:00 A.M. until 2:30 P.M.
After hours natural gas future trading is conducted via the GLOBEX internet-based trading platform
beginning at 3:15 P.M. on Mondays through Thursdays
and concluding at 9:30 A.M. the following day. On
Sundays, the session begins at 7:00 P.M. All times
are New York time.
Trading Months
Natural Gas
Futures: 72 consecutive months commencing with the
next calendar month (for example, on January 2,
2002, trading occurs in all months from February
2002 through January 2008).
Minimum Price Fluctuation
Natural Gas
Futures and Options: $0.001 (0.1˘) per mmBtu ($10.00
per contract) Therefore a $1 move up or down is equal to $10,000 per natural gas
futures contract.
Maximum Daily Price Fluctuation
Natural Gas
Futures: $3.00 per mmBtu ($30,000 per contract) for
all months. If any contract is traded, bid, or
offered at the limit for five minutes, trading is
halted for five minutes.
Natural Gas
Options: No price limits.
Last Trading Day
Natural Gas
Futures: Trading terminates three business days
prior to the first calendar day of the delivery
month.
Natural Gas options: Trading terminates at the close of business
on the business day immediately preceding the
expiration of the underlying natural gas futures contract.
Exercise of Options
By a clearing member to the Exchange clearinghouse
not later than 5:30 P.M. or 45 minutes after the
underlying natural gas future settlement price is posted,
whichever is later, on any day up to and including
the natural gas options expiration.
Option Strike Prices
Twenty strike prices in increments of $0.05 (5˘) per
mmBtu above and below the at-the-money strike price
in all months, plus an additional 20 strike prices
in increments of $0.05 per mmBtu above the
at-the-money price will be offered in the first
three nearby months, and the next 10 strike prices
in increments of $0.25 (25˘) per mmBtu above the
highest and below the lowest existing strike prices
in all months for a total of at least 81 strike
prices in the first three nearby months and a total
of at least 61 strike prices for four months and
beyond. The at-the-money strike price is nearest to
the previous day's close of the underlying natural
gas future
contract. Strike price boundaries are adjusted
according to natural gas futures price movements.
Trading Symbols
Futures: NG
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for actual natural gas futures and options quotes, prices, expirations, charts .....
To learn more about the energy futures visit
unleaded gas futures,
crude oil futures and
heating oil futures.
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