Thursday, August 14, 2008

Summer Natural Gas Trade (UNG)

I am sure this is old news but natural gas (UNG) tends to bottom every summer and then improve near the fall. This is mostly due to the fact that natural gas is a relatively local commodity. Excess natural gas is stored during the summer and then used for heating in the winter.

So, an idea is to sell the at-the-money natural gas ETF (UNG) puts. For example, the Sep 37 Put for 2.50 is a 7.2% return on risk over a month. As any commodity, it's very volatile which is why the premiums are good.

It's not as risk free as the chart would seem because there is an underlying trend in natural gas, but with options, it is possible to mitigate that risk and profit.

This can also be done with natural gas stocks, e.g. Chesapeake Energy (CHK).

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