Natural gas’s implied volatility

On June 22, 2017, natural gas (BOIL) (FCG) (GASX) active futures’ implied volatility was 35.4%, up 0.7% compared to its 15-day average.

Will Natural Gas Break below $2.8 Next Week?

In the week ended June 22, 2017, natural gas’s implied volatility fell 0.7%. Natural gas July futures plunged 5.2% during this period. Refer to part one of this series to know more about the factors that jolted natural gas prices between June 15 and June 22, 2017.

However, in most periods, implied volatility and natural gas futures moved in opposite directions. In one such instance, on November 11, 2016, natural gas active futures tumbled to their lowest closing price in the past three months. On November 14, 2016, natural gas’s implied volatility spiked to 56.2%. The above graph outlines this inverse relationship. From November 14, 2016, to date, natural gas active futures rose 10.6%. Between these two dates, natural gas’s implied volatility fell 37%.

Implied-volatility-based natural gas price range

Based on a normally distributed bell curve, a standard deviation of 1.0, and implied volatility of 35.4%, natural gas active futures could close between $2.76 and $3.04 per million British thermal units in the next seven days. There is a 68% chance of prices settling in this range.

On June 22, 2017, natural gas July futures settled at $2.90 per million British thermal units. If the natural gas downturn continues, then the $2.8 level could be tested. Natural gas futures below $2.8 per million British thermal units could be a concern for natural-gas-related ETFs like the United States Natural Gas Fund LP (UNG) and the Direxion Daily Natural Gas Related Bull and the Bear 3X Shares ETF (GASL).

To know more about natural gas price movement, check out our weekly coverage on natural gas prices.

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