Futures Now

This explains the strange action in natural gas

Strange natural gas action explained

It's called "the widow maker" for a reason.

Natural gas futures for March delivery fell some 8 percent on Tuesday, after an extremely volatile Monday session that saw the commodity lose 17 percent in eight hours.

These two days of serious losses came after a gut-wrenching rally that saw nat gas rise from $4.81 per million British thermal units to above $6 in four sessions.

But even as the March futures plunged on Tuesday, the April futures clung onto a modest gain for much of the session. This is because the March contract expires Wednesday, so even as traders rushed to exit positions, some looked to the April contract as they continued to make bullish bets on the fuel.

For traders who speculate on the futures of natural gas or any other commodity, it is imperative to exit a long position in order to avoid receiving the physical commodity (or "taking delivery").

"Rather than just bailing out of their longs in March, [some traders] still have faith that this market's going higher, so what they're doing is selling March, buying April," said Anthony Grisanti of GRZ Energy on Tuesday's episode of "Futures Now." "So that's why you see the March contract lower today, and the April contract up a bit, because the money is still flowing to natural gas right now, looking for higher numbers."

Indeed, while about 60,000 March contracts traded on Tuesday, some 175,000 of the April contracts traded.

Yet while the contract rollover explains the move, it doesn't quite explain its magnitude.

"This volatility is unprecedented for this market," Grisanti said. "This is completely abnormal for these markets. Usually you'll see 3-, 4-, 5-cent—not a $1.50 move, which is what we've seen."

(Read more: Natural gas could rise to $8: Energy expert)

Natural gas production platform.
Getty Images

For traders who got short the March contract before nat gas spiked to the upside, though, the plunge has been like manna from heaven.

"We jumped in before the big pop before $5.5 to $6," said Rich Ilczyszyn of iiTrader. "We had no idea that it would go up like it did, and it was torture. But we stuck with the idea into expiration with the idea that the recent longs would ... get out, and thank god that happened."

Ilcyzsyzn even managed to eke out a small profit on the trade.

"It was amazing," he added. "It was blessed by the gods."

—By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex.

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