Example assumptions: Prices, premiums, margin deposits, exchange names and contract sizes below are historical teaching inputs. They are not current quotes or an offer of a listed contract. Check the current market resources and the exact option or futures specifications. Examples exclude fees and funding costs.
If you are bearish on natural gas, you can profit from a fall in natural gas price by taking up a short position in the natural gas futures market. You can do so by selling (shorting) one or more natural gas futures contracts at a futures exchange.
Example: Short Natural Gas Futures Trade
You decide to go short one near-month NYMEX Natural Gas Futures contract at the price of USD 5.5150/mmbtu. Since each Natural Gas futures contract represents 10000 mmBtus of natural gas, the value of the contract is USD 55,150. To enter the short futures position, you have to put up an initial margin of USD 8,775.
A week later, the price of natural gas falls and correspondingly, the price of NYMEX Natural Gas futures drops to USD 4.9635 per mmbtu. Each contract is now worth only USD 49,635. So by closing out your futures position now, you can exit your short position in Natural Gas Futures with a profit of USD 5,515.
| Short Natural Gas Futures Strategy: Sell HIGH, Buy LOW | |
| SELL 10000 mmBtus of natural gas at USD 5.5150/mmbtu | USD 55,150 |
| BUY 10000 mmbtus of natural gas at USD 4.9635/mmbtu | USD 49,635 |
| Profit | USD 5,515 |
| Initial margin (assumed collateral) | USD 8,775 |
| Return on assumed initial margin | 62.8490% |
Margin Requirements & Leverage
In the examples shown above, although natural gas prices have moved by only 10%, the ROI generated is 0.0000%. This leverage is made possible by the relatively low margin (approximately 15.9112%) required to control a large amount of natural gas represented by each contract.
Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.
Learn More About Natural Gas Futures & Options Trading
- Natural Gas Futures Basics
- Buying Natural Gas Futures to Profit from a Rise in Natural Gas Prices
- Natural Gas Options Basics
- 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
What the margin return leaves out
The return shown divides the example’s gain by its assumed opening collateral. It is not a return on a fully paid commodity purchase, an expected return, or a loss limit. Brokers can change margin requirements or liquidate positions, and futures losses can exceed the amount initially deposited. Some contracts can trade below zero; do not assume a universal zero price floor.
