Natural Gas call options give a buyer exposure to rising futures prices. Follow one contract from premium paid to its result at expiration.
How natural gas options work
The examples use options on Henry Hub natural gas futures. A call gives the right to enter a long futures position at the strike price. A put gives the right to enter a short futures position at that price.
A US gas consumer may buy Henry Hub calls against rising costs. A local utility still faces differences between its delivery-point price and Henry Hub.
The cost of one option
One NYMEX contract represents 10,000 MMBtu. At a premium of $0.2 per MMBtu, one option costs $2,000 ($0.2 × 10,000).
Assume the futures price and strike are both $3 per MMBtu. The call and put premiums are each $0.2 for comparison, not current quotes. Results below are at expiration, before fees, with any futures position from exercise immediately closed at the stated price.
Buying natural gas calls
Suppose you expect natural gas prices to rise and buy one $3 call for $2,000.
If the underlying future reaches $3.6 per MMBtu at expiration, buying at $3 gives an advantage of $0.6 per MMBtu. Across 10,000 units, that is $6,000. After the premium, your net profit is $4,000.
At $3 or below, the call expires worthless and the loss is $2,000. Breakeven is $3.2 per MMBtu: strike plus premium. At $3.1, the call has value but still loses $1,000 after its cost.
Before expiration
An option can be sold to close before expiration when a market is available. Its price then includes the effect of remaining time and implied volatility, so an earlier trade need not break even at the expiration price calculated above.
The purchased option can lose its whole premium. Exercise can create a futures position requiring margin and exposing you to further gains or losses. An uncovered seller can lose more than the premium received.
Natural Gas price chart
OANDA Natural Gas CFD reference price. This broker CFD (contract for difference) is a market reference, not a spot price or an exchange futures contract. Prices and quoting units may differ from the contracts described in this guide. Check the widget timestamp and market status; prices may be delayed.
