ProShares Ultra Bloomberg Natural Gas: Trading Short-Term Tailwinds (NYSEARCA:BOIL)

The ProShares Ultra Bloomberg Natural Gas ETF (NYSEARCA:BOIL) is a leveraged ETF designed to produce twice the daily return of the Bloomberg Natural Gas Subindex.

I’ve written about the ProShares Ultra Bloomberg Natural Gas ETF twice in the past year, rating it a Strong Sell late last July in “BOIL: A Deeply Flawed ETF for Investors” and in early February this year in “BOIL: Not a Buying Opportunity.”

In both cases, my caution proved warranted – BOIL is down almost 80% from where it was last July when I issued my Strong Sell rating, and it’s down almost 25% from my last article in February.

Let me be clear about two points:

First, a warning:

BOIL is a terrible long-term investment.

Those looking to buy US natural gas at current depressed levels in anticipation of a longer-term recovery in prices could be absolutely correct about the path of natural gas into 2025 and still lose money, potentially significant money, due to the way this ETF is constructed.

Second, I still see some risk in BOIL near-term; however, the upside and downside risks over the next 3-4 months are more tilted to the upside than when I issued my “Strong Sell” rating back in February and I see the potential for a significant seasonal rally later this summer. So, I am raising my rating on this ETF from Strong Sell to Buy.

Once more, let me underline that this is an intermediate-term trading call, NOT a long-term call on the merits of BOIL.

Investors looking to profit from a longer-term rally in natural gas should consider a gas-focused producer such as EQT Corp.(EQT), which I profiled back on February 16^th in “EQT: The Low-Cost Gas Producer is a Buy,” or a balanced gas-oil producer like Devon Energy (DVN), which I profiled in “Devon Energy: Turnaround Underway, Time to Buy.”

In this article, for those looking to trade a seasonal rally in natural gas, I’ll outline an options spread strategy for trading BOIL this summer that makes use of hefty implied volatility in the ETF’s call options.

BOIL Construction

As I mentioned, BOIL tracks two times the daily change in the Bloomberg Natural Gas Subindex, not the front-month price of natural gas.

That’s an important distinction.

The last day of trading for the May 2024 NYMEX natural gas futures contract was Friday, April 26, 2024. That contract settled at $1.614/MMBtu, according to Bloomberg on Friday afternoon.

However, the open interest in this contract has been falling since early April as traders have rolled into the June 2024 NYMEX futures, which settled at $1.923/MMBtu on Friday, per Bloomberg. Starting in early May, I’d expect to see traders gradually roll in to the July 2024 futures with most of the open interest in the June futures evaporating long before the contract’s last day of trading on Wednesday, May 29^th.

For the next few weeks, however, when you hear the price of natural gas referenced in the mainstream and financial media, the conversation will likely be centered on the price of the June 2024 futures.

However, BOIL doesn’t track the June 2024 natural gas futures; indeed, the ETF has never tracked the June 2024 gas futures contract. That’s because the Bloomberg Natural Gas Subindex tracks US gas prices using the following futures roll schedule:

The Bloomberg Commodity Index Methodology Report lays out the roll schedule for the Bloomberg Indices.

This table presents the schedule for natural gas, and I’ve highlighted the roll months in green and boldface type. So, for example, April 2024 was a “roll month” for the Bloomberg Natural Gas Subindex, meaning the index began the month tracking the May 2024 natural gas futures and will end the month tracking the July 2024 futures.

Specifically, on the sixth business day of April 2024 (April 8^th) the index tracked 80% May futures and 20% July futures, on the 7^th business day the index shifted to 60% May and 40% July. The roll continued at the rate of 20% each day for 5 business days until the index fully tracked the July 2024 gas futures.

May is not a roll month. That means from now until the 5^th business day of June, the Bloomberg Natural Gas Subindex and, by extension, BOIL will be tracking the July 2024 NYMEX natural gas futures contract.

And that brings me to two key risks to understand about BOIL:

The Calendar Roll Yield

The best way to think about BOIL is that when you buy and hold the ETF, you’re not really buying natural gas, or even natural gas futures, you’re buying into a predetermined set of trades over time.

So, for example, if you bought BOIL on Friday, you’d be tracking the July 2024 NYMEX gas futures as I outlined earlier, trading at $2.284/MMBtu per Bloomberg. However, after the scheduled roll in early June you’ll be tracking the September futures, which currently sell for $2.42/MMBtu.

Then in early August, the ETF rolls to track the November 2024 futures, which sell for about $2.943/MMBtu.

Two points to note about this.

First, a lot of individual investors I speak to think that when you buy BOIL today, you’re buying gas near multi-year lows under $2/MMBtu and stand to score a nice profit if natural gas prices recover to $3/MMBtu or higher later this year during winter heating season.

You’re not. It’s the June futures – the current front-month – that trade under $2/MMBtu; however, BOIL tracks July, which is at closer to $2.30/MMBtu as I just outlined.

And you’re not really buying gas at just under $2.30/MMBtu, either. You’re buying a little over 1 month worth of exposure to July 2024 futures and then the index, and BOIL, will roll to track September 2024 gas, which sells for $2.42. If you hold until August, you’ll be tracking November 2024 which, as of right now, trades at just under $3.00/ MMBtu.

So, if absolutely nothing changes for gas, you could buy BOIL today, wait until later this year and watch the front-month price of gas jump all the way to $3.00/MMBtu. However, that’s already baked into the natural gas futures curve, and it means you won’t necessarily profit from owning BOIL; indeed, as I’ll explain in a moment, you might very well lose money in such a scenario due to the compounding risk in BOIL.

Second, take a look at the natural gas futures curve right now:

Natural gas futures are listed for delivery in every calendar month of the year for multiple years into the future.

This chart shows the current trading price of natural gas for delivery in every month from June 2024 through December 2025. I’ve labeled the contracts BOIL will track between now and early December 2024 – that’s the July 2024 futures followed by the September 2024 futures, the November 2024 futures and, finally, the January 2025 futures.

When the futures curve for a commodity has an upward slope – the price of futures for delivery in the future is higher than the spot price or the front-month — that’s known as contango. The opposite of contango is backwardation – a situation where the front month futures trade at a higher price than more distant contracts.

However, this point is crucial: futures market curves can be both in contango and backwardation depending on the time frame — the segment of the curve — you look at.

For example, broadly speaking, the current gas futures market is in contango through January 2025 – that’s because the front-month June contract trades under $2.00/MMBtu while January 2025 futures are trading at $3.78/MMBtu.

However, I would say that the contango from the July through September futures is shallow because the futures curve is pretty flat – the July futures trade at a little under $2.30, August is at $2.41/MMBtu and September is at $2.42. The period from October 2024 through January 2025 represents a much steeper contango.

Similarly, looking at the curve beyond January 2025, we can see it has a downward slope into the April/May 2025 contracts – that’s backwardation – followed by a shallow contango through the early autumn 2025 delivery months.

A simple rule of thumb: Contango is bad for BOIL because it gives rise to something called negative roll yield.

That means, if you buy a futures contract trading at a premium to the spot or front-month futures, there’s a tendency for the price of that contract to decline more in line with the spot/front-month price over time. There are a few fundamental reasons for that.

One is that contango is the market’s way of telling participants to store the commodity. That’s because if you can purchase natural gas at under $2.00/MMBtu today (the June 2024 futures) and store that gas until January 2025, you could lock in a price of $3.78/MMBtu by selling January 2025 gas futures. As long as the cost of storing gas from June through January is less than the difference in price (the contango), that yields a profit.

Typically, markets are in contango when there’s a near-term glut of the commodity while backwardation tells you the opposite, a market that’s undersupplied as was the case with West Texas Intermediate (WTI) crude oil as I explained in this article on Seeking Alpha back in January.

So, a market in contango includes a sizable storage premium for future months – as time passes that storage premium fades, leading to a roll down in the futures over time closer to the spot/front-month price.

In this case, this negative roll yield is a problem – potentially a large problem – for those who wish to hold BOIL through early next year. That’s because the contango in the curve is a whopping $1.97/MMBtu from June 2024 through January 2025, more than 100% of the June 2024 futures price as of Friday’s close.

For those looking to trade shorter term moves in natural gas, the futures curve over the next few months has a far more manageable slope – the difference between June 2024 and September 2024 is about $0.50/MMBtu and for July 2024 through September is just $0.138/MMBtu.

Please understand that a negative roll yield does not guarantee the price of future months’ contracts will decline more in line with the spot price – underlying market fundamentals can, and do, overwhelm this roll effect. Indeed, as I’ll explain in a moment, I believe that’s likely to be the case as we move through this summer.

However, contango is certainly an obstacle for an ETF like BOIL because of the negative roll yield and for those who seek to hold BOIL over the longer-term, that 100% premium of January 2025 futures over June 2024 represents a gale-force headwind.

In contrast, traders have a short window this summer when contango will be less of a headwind for BOIL. It likely means, however, that unless there’s a major shift in the shape of the curve, traders would want to consider exiting bullish trades on BOIL within a week or two following the ETF’s roll into November 2024 futures in the first half of August.

And that brings me to this ETF’s second major risk:

Compounding Risk

Recall that BOIL is a leveraged ETF designed to track twice the daily percentage return in the Bloomberg Natural Gas Subindex – that means if the index rises 2% in a given day, you’d expect to see BOIL trade up by about 4%.

However, that does not mean BOIL will track twice the percentage changes in the index over holding periods longer than a single trading day.

Take a look:

This table shows the performance of BOIL and the Bloomberg Natural Gas Subindex from the close on April 5^th through the close on April 26^th.

The natural gas futures market trades on a different schedule — different trading hours — than the NYSE where BOIL is traded. So, this table compares daily changes in BOIL’s net asset value (NAV) and the Bloomberg Natural Gas Subindex.

The column labeled “Bloomberg NG Index (%)” shows the one-day percentage price change in the index itself, while the next column shows two times the one-day percent change, which is the targeted daily performance for the BOIL fund.

The next column to the right shows the actual daily change in the NAV of BOIL.

As you can clearly see, BOIL tracks its benchmark closely – the difference between the change in BOIL’s NAV and twice the daily change in the Index is never more than 0.02% on any trading day on my table.

In fact, since the final column on my table shows BOIL’s return less the change in the benchmark, a positive number indicates BOIL outperformance. BOIL generally outperformed its benchmark slightly through this period.

However, look at the final row on my table highlighted in red. This shows the change in BOIL and the Bloomberg Natural Gas Subindex over the entire 15 trading day (3-week) holding period.

As you can see, the Bloomberg Natural Gas Subindex was down 0.86% over this time period and two times -0.86% is a decline of 1.72%. However, BOIL’s NAV was actually down 2.27% over this period, more than half a percent worse than twice the decline in the Index.

Of course, 0.55% may not sound like a huge degree of underperformance, but this is over just 3 trading weeks – on an annualized basis this can add up quickly. For example, since I penned a bearish piece on BOIL in early February, the Blomberg Natural Gas Subindex is down 11.66% and twice that decline would be 23.32%; however, BOIL is down 25.48%, more than 2 percentage points in underperformance over a holding period of just under three months.

Simply put, as I explained in my piece in February, compounding daily leveraged returns in an index will cause significant deviations between the benchmark and ETF over longer holding periods. As a rule of thumb, the longer you hold the ETF, and the more volatile changes in the underlying index (natural gas in this case), the greater the magnitude of the compounding risk.

Again, this is a problem if you’re buying BOIL to hold it for 6 or 12 months because natural gas prices are notoriously volatile, and that’s a long time for the compounding errors to add up. The risk still exists for traders contemplating shorter holding periods; however, it’s more manageable.

With these warnings to longer-term holders in mind, I see scope for a rally in BOIL into August 2024.

Gas Seasonals

There’s a positive seasonal tailwind for natural gas in the summer months; however, that bullish seasonality doesn’t gain traction until late June for the Bloomberg Natural Gas Subindex.

Take a look:

This chart is based on daily changes in the value of the Bloomberg US Natural Gas Subindex for 85 trading days, starting on the first business day of May. Of course, the exact date will vary from year-to-year; however, 85 trading days from early May typically encompasses trading into the final trading days in August.

To create this chart, I calculated the average percent return in every year starting in May 2011 over this period and normalized the starting value to 100.

As you can see, on this basis, natural gas prices have tended to remain volatile with a downside bias throughout the month of May and most of June. The subindex does tend to find a seasonal low around the end of June and then rally through the end of August.

It’s important to be careful with seasonality, as humans have a well-established knack for finding patterns in random data. So, when looking at seasonals I always dig a bit deeper to ascertain if there’s a logical underlying fundamental trend that could explain the patterns I’m seeing.

In this case, I believe there is:

The Energy Information Administration (EIA) releases its Weekly Natural Gas Storage Report each Thursday morning at 10:30 AM Eastern Time. It’s widely watched by futures traders and is often a market mover for natural gas and ETFs like BOIL.

The headline storage number tells us how much gas the US has in underground storage, measured in billions of cubic feet (Bcf), every week of the year. Compare the current level of storage to the 5-year seasonal average, and how it changes over time, to get a good read on supply and demand conditions in the natural gas market. For example, last week the EIA reported the US has 2,425 bcf of natural gas in storage (2.425 trillion cubic feet), which compares to 1,986 bcf in storage at the same time in 2023 and a 5-year average storage level for this week of 1,770 bcf.

In other words, the US gas market is oversupplied right now, with storage well above the 5-year average for this time of year. Based on the same data set on the EIA’s website, US natural gas storage has not been this bloated in April since 2016.

There are two seasons for US natural gas storage: Injection season, which runs from roughly early April through early November, and withdrawal season, from early November through late March. During injection season, US natural gas demand tends to be lower than supply/production, so the US tends to add to gas in storage each week.

During the cold winter months, when demand for gas is elevated, supply is insufficient to meet demand, so the US withdraws from gas storage to fill the supply/demand gap.

If you look at my chart above, I’ve plotted the average weekly injection or withdrawal from gas storage for the 35-week period beginning in the first week of March and ending in late October as a blue bar. This is the average for every year from 2011 through 2023 inclusive. As you can see, this period encompasses the tail end of withdrawal season in March and most of injection season from April through October.

That’s why the blue bars are negative on the left side of my chart (through March) and positive as you move into April and straight through to October.

However, take a look at my chart again, and you’ll see the pace of weekly injections into storage tends to decline from the end of May into July. In addition, there’s a particularly notable decline in average gas injections into storage in late June and early July. Following that, US natural gas injections remain below about 50 bcf per week through to late August.

This corresponds to the height of the summer cooling season:

This chart shows data from the EIA’s Natural Gas Monthly report showing monthly consumption by four major end-user categories – residential, commercial, industrial and electricity generation – from January 2018 to January 2024.

As you can see, the period of seasonal peak US natural gas demand each year is winter – usually the month of January – and that’s mainly driven by demand from residential and commercial consumers. According to EIA, this mainly represents gas delivered to homes and businesses to produce heat. See the yellow circles overlaid on the chart for 2018-19 as an example.

There’s also some expansion in electricity generation in winter (an expanding light blue area due, in part, due to demand for electric heat.

There is a second, and much smaller, spike in gas demand in the summer that’s also labeled on my chart. This mini-spike is the result of summer cooling and air conditioning demand, which shows up as a rise in demand for gas from electric power generators.

Notice how these seasonal demand patterns, and the corresponding slowdown in natural gas storage injections through the second half of June and July, line up well with the seasonal strength in natural gas I outlined earlier.

That’s a compelling fundamental rationale in my view.

Take one more look at my chart showing average weekly gas storage injections from early March to late October as blue columns. I’ve also plotted orange columns on this chart showing storage injections from early March to date in 2024.

As you can see, US gas storage withdrawals in March were lower than average this year and since the injection season started in early April, the pace of storage builds has generally been higher than seasonal norms. That’s bearish on both fronts, and it helps explain why natural gas prices, and the natural gas subindex, have remained weak straight through March and April.

Timing the Seasonal Turn

The question that springs to mind is:

Why turn bullish on natural gas now for a trade when the period of seasonal strength doesn’t usually begin until late June as cooling demand takes off?

The answer is, I see two potential upside drivers for gas this year that may shift the seasonal pattern forward by a few weeks. First up, the National Weather Service Climate Prediction Center’s latest forecast shows above-average probability of a hotter-than-normal summer in 2024:

Clearly there are no guarantees when it comes to the weather – not even close – but if the summer gets off to a hot start, it’s possible the summer decline in weekly storage injections could get underway earlier in June than normal this year.

Second, and more important in my view, US gas producers are responding to the decline in gas prices, and bloated storage, by cutting production.

Earlier this year, the largest independent gas producer in the US, EQT Corp. (EQT), curtailed production in response to lower prices and on their Q1 earnings call last week, management issued guidance factoring in 1 Bcf/day of production curtailments in Q2 at least through May on acreage EQT operates.

In Q1 2024, EQT produced 534 billion cubic feet of gas equivalent (Bcfe) and the midpoint of their guidance for Q2 is for about 480 Bcfe, a more than 10% sequential decline in production.

Chesapeake Energy (CHK), a major producer in both the Marcellus Shale of Appalachia where EQT operates as well as the Haynesville Shale of Louisiana, announced that it was deferring turn-in-lines (TILs). TIL is an energy industry term that refers to the process of putting a drilled and completed (fractured and ready-to-produce) well into production.

Chesapeake is due to report its Q1 2024 results on May 1^st. However, the company’s full-year 2024 guidance issued back in February anticipated a decline in natural gas production from 3.47 bcf/day in 2023 (gas only, not gas equivalent) to 2.7 bcf/day for full year 2024. That’s a decline of about 9.2% year-over-year in 2024.

Smaller producers such as Comstock Resources (CRK), which I covered in a piece in January here on SA, issued guidance for 2024 production of about 1.475 bcfe/day in 2024 from its operations in the Haynesville, down from a pace of around 1.562 bcf/day in Q4 2023.

These announced production curtailments and TIL deferments are showing up in the form of falling production from the two largest gas-focused shale fields in the US, the Haynesville, and the Marcellus (Appalachia):

This chart shows a Bloomberg estimate of natural gas production from the Haynesville Shale region of Louisiana and Texas (orange line, right-hand scale) and the Marcellus Shale in Appalachia (blue line, left-hand scale). Pictured is the 7-day simple moving average for both basins since early 2023 in millions of cubic feet per day. Estimates are based on pipeline flow data.

You can clearly see the impact of well shut-ins amid cold weather back in January 2024; more recently, starting in late February and early March, you can see that production is falling due to the announced production curtailments and deferred TILs I outlined earlier. Supply is falling as producers respond to low gas prices by cutting output.

So far, as I showed you earlier, the drop in gas production isn’t showing up in the EIA’s weekly storage data – as I explained, storage injections through March and April have generally been above the long-term seasonal average and storage is the most bloated it’s been in absolute terms since 2016.

However, production cuts are cumulative in nature.

As of last week, EIA reported the US had some 2,425 billion cubic feet of natural gas in storage, some 655 bcf above the 5-year seasonal average for the week of 1,770 bcf. So, if a large producer like EQT cuts production by 1 bcf/day that’s meaningful for EQT, but only adds up to 30 bcf of reduced production over the course of a month. So, in the context of that 655 bcf storage overhang, that’s only a small amount – less than 5% — in percentage terms.

Over time, however, production cuts from multiple producers accumulate – over the course of the next (roughly) six months the cumulative impact of production curtailments and TIL deferments should help to bring down US storage closer to the seasonal average. Simply put, it takes time for production curtailments to accumulate and show up in the EIA data.

Second, I believe the shoulder season currently underway may be obfuscating improving fundamentals.

Shoulder season refers to the period between winter heating and summer cooling season – the valley for US natural gas demand in the chart I showed you earlier. We’re in the thick of that period right now, so gas demand is low – in much of the country, it’s too cool to turn on the air conditioning and too warm for heat.

That will change as we move into June.

So, I believe the combination of these two catalysts – rising cooling demand in a hotter-than-average summer and falling production – could enhance the normal seasonal rally for gas from June into late August.

Conclusion and How to Trade BOIL

I have written two bearish articles on BOIL in the past year – one last July and one in early February this year, rating the ETF a “Strong Sell.” In both cases, my negative view on the ETF proved correct; BOIL is off 25% since my February article alone.

BOIL has two major flaws for long-term investors: A negative calendar roll yield and a compounding risk due to the way it tracks twice the daily return in the Bloomberg Natural Gas Subindex rather than returns over longer holding periods.

However, from a trading perspective, the risks for BOIL are skewed to the upside through August. That’s due to a bullish seasonal tailwind for the Bloomberg Natural Gas Subindex starting in late June and additional catalysts in the form of shale production curtailments – falling supply – and forecasts for a warm summer and high electricity demand this summer.

The shift in risks for BOIL in favor of near-term upside merits a boost to my rating from Strong Sell to Buy.

Traders looking to take a bullish position in BOIL should consider using the options market rather than buying the ETF itself.

As I’ve explained, while there’s already much talk of positive seasonality for BOIL, the big surge in summer cooling demand is historically timed for late June and early July. Over the 2011 – 2023 period, the Bloomberg Natural Gas Index has remained volatile with a downside bias into mid-to-late June; the seasonal rally typically doesn’t kick off until the second half of June.

Thus, investors buying BOIL today could be exposed to significant day-to-day downside risk and price volatility in gas for another month and a half. That volatility is magnified due to BOIL’s leverage tracking twice the daily return in the Natural Gas Subindex.

One way to trade BOIL right now is a using a calendar call spread to benefit from both near-term volatility and upside later in the summer.

Specifically, on Friday BOIL closed around $13.19 and the slightly in-the-money September 20, 2024 $13 calls were selling for around $3.25 ($325 per contract). At the same time, the June 21, 2024 $16 calls, almost $3 out of the money, were selling for around $0.92.

A calendar spread could be formed by buying to open the September calls at $3.25 and selling to open the June 21^st $16 calls for a net debit of around $2.33 ($233 per contract).

There are 3 basic possibilities for BOIL through June 21^st:

The ETF could rally significantly and close above $16 on Friday, June 21^st. In this case, the value of the September BOIL $13 calls owned as part of the spread would rise, as would the value of the $16 calls sold. However, the minimum value of the spread on June 21^st would be over $3.00.

For example, assume BOIL approaches the close on June 21^st at $18.00. The intrinsic value of the September 20th $13 calls would be $5 — the hypothetical June 21^st close of $18 less the strike price of $13. In addition, of course, those September options would still have approximately 3 months until expiration, so they’d retain significant time value.

At the same time, the June 21^st $16 calls would sell for around $2 – at expiration, options have no time value remaining and the intrinsic value is $2 (the hypothetical price of $18 less the strike price of $16.)

In that event, you could close the spread for a profit by buying to close the June 21^st $16 calls and selling to close the September 20^th $13 calls.

Alternatively, you could choose to extend the trade by buying to close the June 21^st calls for a small loss of $108 per contract ($2 the buy to close the calls less $0.92 in premium earned). Following that, you could either simply hold the September calls to profit from further upside in BOIL or sell a call with a later expiration date and a higher strike to generate additional premium income and further reduce your cost basis in the trade.

The best outcome would be for BOIL to rise slightly, or trade sideways, and close in late June just under $16. In this case, the options you sold would expire worthless, generating premium income, and you’d be free to hold the calls in anticipation of additional upside in BOIL through the seasonally strong July-August period.

Another options would be to sell BOIL calls with a later expiration date — any date up to or including the September 20, 2024 options expiration series — and a higher strike price to generate premium income and further lower your risk in the trade.

The third outcome is a significant drop in BOIL through late June. In this scenario, you would likely lose money in the September 20^th $13 BOIL calls, though they’d retain some time value because they’d still have about three months until expiration. In addition, because the calls you sold would expire worthless, the premium received would reduce your losses.

I prefer a calendar call spread for trading BOIL at this time to an outright long for three reasons.

First, you have limited downside risk. In the example I gave above your maximum downside risk would be the cost of the spread, which would be $233 per contract – that’s the $3.25 cost of the September 20, 2024 BOIL $13 calls less the premium income of $0.92 for selling to open the June 21, 2024 BOIL $16 calls, multiplied by 100 ETF units per contract.

If you took a 3-contract position, for example, your maximum downside risk would be around $699 (3 multiplied by $233).

Second, implied volatility priced into BOIL options is high:

The blue line on this chart shows the annualized volatility priced into BOIL calls with approximately 30 days until expiration on a year-to-date basis; for comparison purposes, I’ve plotted the call implied volatility for the SPDR S&P 500 ETF (SPY) as an orange line. As you can see, BOIL’s implied volatility is near 90% compared to SPY at around 13% to 14% right now.

That has two advantages for the calendar call spreads.

First, the out-of-the-money June 21^st calls are expensive, and selling those calls is an attractive means of lowering the net cost of the September 20^th at-the-money calls.

Second, at expiration of the short leg of the calendar spread on June 21^st, the BOIL September 21^st calls are likely to retain significant time value even if BOIL falls in value. Per the Bloomberg options calculator, the September 20, 2024 BOIL $13 calls would still be worth over $0.90 on June 21^st assuming BOIL’s implied volatility holds near 90% and the ETF declines in value to $10 per unit from over $13 right now.

That’s just an estimate based on a standard options pricing formula. However, even if this trade goes awry, and BOIL takes a significant leg lower by late June, it’s likely your loss would be well below the $233 cost of the spread by late June.

Third, using a calendar spread takes advantage of the seasonal pattern in the Bloomberg Natural gas Subindex I’ve outlined. Specifically, the index normally sees volatility with a downside bias through late June, followed by a seasonal rally through late August. If that pattern holds, the June 21^st calls would expire worthless, handing you some premium income to lower downside risks, and you’d be positioned to enjoy the upside via the September $13 calls as the normal seasonal rally takes hold.

In closing, I’d stress three points.

First, BOIL remains a terrible long-term investment for those looking to profit from longer-term upside in gas. In particular, the negative calendar roll yield will become an increasing headwind for BOIL after mid-August once the ETF rolls into the November gas futures and faces steep contango through January 2025.

Second, there remain downside risks for gas and my more constructive view. In particular, if the summer weather turns out to be milder than expected and summer cooling demand lower than expected, it would take longer for recent shale production cuts to show up in the storage data. This could delay or short-circuit the normal seasonal rally in gas this summer.

Third, I prefer using calendar spreads to trade a potential rally in gas to an outright long in BOIL, as the period of seasonal strength for gas won’t kick off until late June and the options spreads allow you to generate some premium income while you wait for BOIL to catch that seasonal tailwind. In addition, these spreads offer defined downside risk in the event the trade goes awry. Select your position size according to your risk tolerance.