Given the extreme volatility, US natural gas futures are not for the faint of heart. However, substantial percentage increases and price declines create an optimal environment for nimble and flexible traders with their fingers on the pulse of the energy commodity. The most direct route to risk positions in natural gas is futures and futures options from CME’s NYMEX division.

Each US NYMEX natural gas futures contract contains 10,000 MMBtus. At $3.20 per MMBtu, the contract is worth $32,000. The original NYMEX margin requirement of $5,602 per contract means a market participant can control $35,000 of natural gas with a 17.5% down payment. If the equity falls below $5,093, the exchange requires maintenance margin payments. Futures are highly leveraged, only increasing the risk of trading natural gas futures.

The US Natural Gas Fund ( UNG ) is an unleveraged ETF that tracks US NYMEX natural gas prices. At $12.30 per share, UNG had more than $402.7 million in assets under management. UNG trades an average of over 29.22 million shares per day and charges a management fee of 1.11%. March natural gas prices fell 53% from early December to early January before rising 71.6% in late January.

The weekly chart shows that during the same period, the UNG ETF fell 41.5% from $17.00 to $9.95 and rose 71% to $17.02. UNG does a good job tracking NYMEX natural gas prices closely. The Ultra Bloomberg Natural Gas 2X ETF (BOIL) and the Ultrashort Bloomberg Natural Gas -2X ETF (KOLD) boost UNG and natural gas price action to the upside and downside, respectively.

At $19.09 per share, BOIL had over $224.24 million in assets under management. BOIL trades an average of over 19 million shares per day and charges a management fee of 0.95%.

As the chart shows, the bullish BOIL ETF fell 67.6% from $46.85 to $15.20 per share from early December to early January before rising 171.4% to $41.25 per share in late January.

At $20.66 per share, KOLD had over $545.62 million in assets under management. KOLD trades an average of over 19.1 million shares per day and charges a management fee of 0.95%.

As the chart shows, the bearish KOLD ETF rose 160.4% from $19.00 to $49.47 per share from early December to early January, then fell 72.8% to $13.44 per share in late January.

Natural gas is already a volatile commodity, and while the UNG ETF does an excellent job of tracking US futures prices, BOIL and KOLD are leveraged vehicles that add to the upside and downside price action, respectively. Natural gas is a trading market, and given its penchant for extreme volatility, passive investors should stay away. When approaching natural gas with leveraged BOIL and KOLD ETFs, price and time stops are critical, as time decay is the price of leverage.

I expect volatile conditions to continue over the coming weeks, as natural gas prices will be as volatile as the weather. However, the odds favor a decline in March and April as the shoulder season begins and typically leads to a decline in demand.

As of the date of publication, Andrew Hecht had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com