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 led to spikes in implied volatility. However, between December 2016 and February 2017, natural gas prices fell steadily. The trending nature of the fall in prices might have caused the implied volatility to fall.
Natural gas’s implied volatility rose to 56.2% on November 14, 2016. Since then, it has fallen 41.5%, while natural gas prices have risen 22.8%. Between May 4 and May 11, 2017, natural gas June futures rose 6%, while natural gas’s implied volatility fell 0.9%.
The above 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 32.9%, natural gas June futures could close between $3.23 per MMBtu (million British thermal units) and $3.53 per MMBtu in the next seven days. The probability of natural gas prices closing in this price range over the next week is 68.0%. On May 11, 2017, natural gas June futures closed at $3.38 per MMBtu.
So, natural gas could rise to $3.50—a level not seen since December 30, 2016. Fundamental data could be the key factor. Be sure to keep an eye on Market Realist’s natural gas coverage on Thursdays.