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Natural gas’s implied volatility rose to 56.2% on November 14, 2016. Since then, it has fallen 34.3%, while natural gas prices have risen 7.2%. Last week, natural gas April futures fell 2.0%. Natural gas’s implied volatility fell 0.40% during the week.
As you can see in the above graph, natural gas’s price and implied volatility were broadly inversely related. When prices rose steadily, implied volatility tended to fall. On the other hand, sharp falls in prices saw implied volatility spike. Lately, natural gas prices have been falling steadily. The slow and steady nature of the fall caused implied volatility to fall.
In Part 1 of this series, we looked at the factors that impacted natural gas prices in the trailing week.
The analysis could be important for natural gas–tracking ETFs such as the ProShares Ultra Bloomberg Natural Gas (BOIL), the Direxion Daily Natural Gas Related Bear 3X ETF (GASX), the United States Natural Gas ETF (UNG), and the Direxion Daily Natural Gas Related Bull 3X ETF (GASL).
On the basis of a normally distributed bell curve, applying a standard deviation of 1.0 and an implied volatility of 36.9%, natural gas April futures could close between $2.80 and $3.10 per MMBtu (million British thermal units) in the next seven days. The probability of seeing natural gas prices in this price range over the next week is 68.0%. On March 17, 2017, natural gas April futures closed at $2.95 per MMBtu.
So while natural gas will likely hold the crucial level of $2.80 this week, the $3.10 level looks possible. Fundamental data could be key. Visit Market Realist’s Energy and Power page for more analysis on natural gas’s fundamentals.