A Great Risk:Reward Nat Gas Trade...
Last week on my blog I wrote a post about my thoughts on
Natural Gas and how the UNG ETF was the cheapest it's ever
been to Oil, to the CRB commodity index, and to Gold.
If you didn't read it, you'll find some charts on both UNG
and natural gas, along with some interesting charts from
Chesapeake on how this collapse in the rig count always
leads to price spike readjustments... especially when market
prices are below the cost of production.
sliderontheblack.com
With Cap & Trade and this administration's strong anti-coal
position, and with new nuclear plants not being a feasible near
term solution... natural gas stands nearly alone as the obvious
clean fuel solution both now, and in the longer term.
The greatest downside threat to the Natural Gas/UNG trade here
is not price, but rather time.
If the US economy has not yet reached bottom, and I don't
think it has; then it may take time for supply and demand
to rebalance. But, given the collapsing rig count, and given
that the market price is now below the cost of production,
that rebalancing is "when, not if"... and has historically
led to a price spike upward when that rebalancing occurs.
And since time plays such a crucial element in profiting
from this trade, let's make time our friend, and not our
enemy...
How do you do that?
By selling LEAP puts, or buying LEAP calls.
Presently, I've made an initial long-sided entry of about
a 1/3rd position long UNG, and I'm also selling puts.
And right now you can sell 2011 LEAP Puts in UNG for some
attractive premiums:
finance.yahoo.com
You can sell the 2011 $8 strike for a $1.00 premium.
The $10 strike for $1.90.
The $12 strike for $2.95
Or, the $15 strike for a big phat $5.10 premium.
January 2011 gives you plenty of time for this trade to play
out, with anything from an anti-dollar inflation trade, to
a cold winter, a hot summer, or the "when, not if" rebalancing
of supply and demand via the collapsing rig counts becoming
a price spike catalyst.
And you can use part of your put sale premiums to buy your
LEAP calls.
Take a look at UNG put sales here... because on a
risk to reward basis, it's a hard one to beat.
The Natural Gas trade on further weakness (say down to $2.50 -
$2.75ish if seen) has the potential to be equal to, what the
rotation from oil to gold did back in late 2000, early 2001.
The oil and gas price spike created a drilling bubble that
has now burst, and with the cost of production now below market
prices...this is a classic "discrepancy between price and risk"
trade, with only time as our enemy.
If you don't trade options, look to scale in slowly over time
with an entry target between $10 and $12.75 and an upside
target of between $16 and $20 by year end, and potentially
$30, even $40 + by 2011 if we get any signs of an economic
recovery, let alone a market wide inflation trade that sticks.
SOTB |
