As we head into Q4, traders in the natural gas market are focused on seasonality and how it has traditionally impacted the futures market. The chart above shows the average performance of the generic front-month futures every month of the year over the last 15 years. The average of these 15 years shows that October and November mark the end of positive seasonal months. As December approaches and we move into Q1 2026, prices are historically weak. This suggests that bullish ideas may be nearing their limit, although there is still potential for upside in October.

The chart above shows the inventory levels and estimates as released by the U.S. Department of Energy. The data reveals a sine wave-like pattern, with inventories building up during the September-October period and then depleting during the colder months from December through April. This inventory build-up contributes to the seasonal pattern of strength observed throughout the summer into early Q4, followed by a transition to weakness as winter begins. Current estimates suggest that inventory levels have not yet reached the peaks of the last two years, indicating there could still be some upside in price, though we might be approaching the end of that trend.

One significant development, distinct from the cyclical trends, is the growth of the U.S. liquid natural gas (LNG) export market. In the past two to three years, following sanctions on Russian gas due to the Ukraine war, the U.S. has emerged as the leading exporter of LNG. While this trend exhibits some seasonality, its  overall direction has been positive. Furthermore, ongoing trade negotiations have positioned U.S. LNG as a key beneficiary. In July, the EU and U.S. reached an agreement for $750 billion in total U.S. energy imports, with LNG as the primary driver. Similarly, Japan committed to expanding U.S. energy imports, largely focusing on LNG, and agreed to invest $550 billion in U.S. energy infrastructure, including LNG production. South Korea pledged $100 billion in energy purchases, predominantly LNG. Even Malaysia and Indonesia, both carbon producers, have made commitments to purchase U.S. LNG. These long-term agreements are expected to provide support to the market during cyclical downturns over the coming years.

While there are positive developments regarding U.S. LNG demand, a significant negative factor is the evolving supply landscape. The chart above illustrates the LNG importer contracts by region, peaking around 2027. This coincides with a massive increase in supply projected over the coming years. The core issue is a substantial wave of new LNG export capacity—nearly 300 billion cubic meters (bcm) globally by 2030, primarily from the U.S., Qatar and Canada—which is set to outpace demand growth. U.S. export capacity alone is expected to almost double to approximately 28 billion cubic feet per day (bcf/d) by the end of the decade, partly due to accelerated project final investment decisions (FIDs) linked to trade negotiations. This expansion is occurring amidst stagnant demand in key markets like China, the world's largest LNG buyer, where consumption has leveled off due to economic slowdowns and a shift towards renewables. These long-term supply and demand dynamics prevent traders from becoming overly bullish or bearish on prices, leading to a range-bound market.

The top chart, a daily Ichimoku Cloud chart for the generic front-month futures, indicates that futures are encountering resistance at current levels. The price is hitting the top of the Ichimoku Cloud range, and the lagging span is also bumping into the same cloud. In contrast, the bottom chart shows the current active front-month contract with a slightly different setup. Prices here are just breaking into the cloud and could have scope for a move above 3.40 to 3.60-3.70 range. This area also aligns with previous support, which became resistance in July/August. A red circle indicates that while October futures have some upside, it is limited.

Turning to the options market, it’s time to assess the levels of CVOL and skew ratio to determine what news might be priced in. The top chart illustrates the CVOL level compared to futures prices, showing a positive co-movement over the last two years. However, despite the recent upward movement in futures, CVOL has remained at some of its lowest levels during this period. The bottom chart reveals a similar co-movement between skew ratio and futures. Unlike CVOL, as futures have risen, the skew ratio has also increased, indicating a higher demand for upside options relative to downside options. While overall volatility has been muted, the rising skew ratio suggests that upside options have likely moved higher, while at-the-money or downside options have kept CVOL compressed. This implies that for long volatility ideas, one should consider the downside, whereas short volatility ideas, the upside might be more suitable. Given the overall CVOL low, long volatility strategies could be more appealing, but it’s also important to consider spreads in case of a more muted move in the underlying asset.

To narrow in on specific expirations and strikes, it’s important to consider the implied volatility surface, either by strike or by delta. The implied volatility surface by delta is shown above. A few key observations  stand out: the at-the-money implied volatility for the JN4V5 through LN4V5 expirations is higher than those around it. Additionally, 25-35 delta calls appear to offer the most premium to implied volatility. Conversely, implied volatility is either similar to or lower than at-the-money implied volatility. Based on this, call butterflies around the JN4V5 area seem attractive for achieving the most favorable break-even.

Pulling all of the information together, asymmetric call butterflies appear appealing. There’s still positive seasonality in futures prices, and trade deal headlines should support the underlying market. However, traders might be cautious as seasonality turns in December, and potential supply issues could affect futures in 2026. Inventory data also suggests further upside, which should support markets. Technical analysis points to upside in October futures, but resistance is expected around 3.70 from both previous support and the Ichimoku Cloud. While overall implied volatility hasn’t reacted significantly to the recent futures rally, the skew ratio has increased, which is also evident on the implied volatility surface.  Given the desire to be short gamma and vega after the initial move, the ideal short strike for the butterfly’s core would be at the highest point on the implied volatility surface, corresponding to JN4V5 upside options.

This points me to a 3.40-3.60-3.70 asymmetric call butterfly. I prefer the asymmetric butterflies because it is difficult to perfectly “middle” a butterfly, meaning having futures end exactly at your short strike. Since this is also a directional play, it’s challenging to get the direction precisely right and avoid losing money if futures move too far. By using asymmetric strikes, traders can still make money on a move above 3.70, even though the maximum profitability is at 3.60. This is also a defined risk idea, where the risk for traders is limited to the premium spent.

The chart above shows the expected return for a 1000 by 2000 by 1000 call butterfly spread. The breakeven for the spread is 3.45, meaning any move above 3.45 will result in profits for traders, with a maximum profit at 3.60 and continued profits even above 3.70. As prices are  trending towards a range, butterflies that allow for some directional movement but profit if prices ultimately settle at a specific level appear attractive.

The flexibility of daily contracts allows traders to explore different expirations to better suit their portfolio. This approach can easily be applied to Thursday or Friday expirations as well, even though I am currently showing the Wednesday expiration.

Executing this call butterfly is simplified using the strategy builder in CME Direct. This tool allows you to trade all three legs as a single package, avoiding the risks associated with entering each trade separately ("legging in"). Within the platform, you can build the spread—buying the 3.40 call, selling two 3.60 calls and buying the 3.70 call—and execute it at a single net price. This approach significantly reduces execution risk and streamlines position management.

Good luck trading!

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