Why do you suggest that the percentage drop in UNG NAV price to 7.81 would be commensurate with the drop in gas price contract? UNG does not behave this way (read the prospectus and 10-K). You understand that they roll these contracts over (4 days?) periods each month and depending on the steepness of the curve and future contracts there are losses or gains incurred that do not correlate to the movement in the price of gas. The premium in my opinion is a dislocation and an opportunity to short, but not an opportunity to extrapolate movement. Instead of selling puts on something that is trading at a crazy premium, I would just rather sell the calls and be short it. My put premium is being discounted massively by the premium on the NAV.
While agreeing with your fundamental reasoning, I think that you can be caught by a devaluation of the dollar and other black swan like events that can take gas higher, although it does not seem likely it will be there.
Banks are presently reviewing their credit lines to gas producing companies based on the current price of gas (according to Bloomberg). The companies barely held onto their credit lines based on last quarter's prices. This quarter, it would be a miracle to see it happen. With no credit lines, then what? Companies will have to cut CAPEX, sell shares, or sell properties to raise the necessary cash.
The only way to hedge this is to actually store it yourself and figure out your cost. It cannot be gamed with the futures and that is what makes UNG and USO terrible investment vehicles because they are not representative units of the commodity, like GLD. They are ETFs of futures contracts that are not regulated by the CFTC. Furthermore, they appear to be poorly traded since everyone knows when they are rolled and since the UNG controls about 1/3 of the market today.
We have gone from trading contracts on a regulated exchange to an unregulated exchange for commodities, essentially, IMO. |
