Futures See-Saw in Typical Pre-Expiration Volatility

After gapping higher on the open and racing to new highs, natural gas futures were hit with a powerful wave of selling late in the session that trimmed most of yesterday's gains and left traders wondering if more selling is in store for the market on its expiration day today.

The October contract finished at $5.324, up 4.8 cents for the session, but off considerably from its $5.445 prompt-month high etched just hours earlier.

Heading into Tuesday's session, traders were in agreement that the market would test resistance early and that the outcome would decide the market's direction for the day. As it turns out, that didn't take long because the market sailed right through $5.30 resistance with a $5.34 opening trade. The next stop was the October contract's all-time high of $5.385, but that too was little more than a speed bump for local and commercial buyers.

However, after watching prices and profits climb throughout much of the session, those with long exposures decided to take profits ahead of the close yesterday. "We sat up there for so long it almost lulled people to sleep," said a Houston-based risk manager. "Everyone who wanted to be long was long already, and the prospect of going home for the evening with fresh longs just off all-time highs was a little more than the average trader was willing to deal with."

Also of impact Tuesday, he continued, was options-related futures selling by traders who had sold $5.50 call options earlier in the day. "As they watched the October contract approach the $5.50 area, they dumped 500 to 1,000 contracts to ensure their options expired unexercised."

Looking ahead, traders agree that the difficult job of picking the market's direction on expiration day is further complicated by the triple threat of news that the market will first need to digest. In addition to the latest API and DOE oil data released last night and this morning, the market will focus on fresh natural gas storage information early this afternoon. Expectations for that report are calling for a net injection of 60-76 Bcf, which if realized would fall short of last year's 78 Bcf build. Comparatively, the five-year average for this week is 72 Bcf.

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