Fabulous Friday – Monday’s Gas Trade Made You $2,000

Have you been reading us all week?

If you’ve been reading us longer than that, you know we LOVE Natural Gas at these low levels. Well, not so low anymore as Natural Gas Futures (/NG) have jumped 0.20 for the week, which pays $2,000 PER CONTRACT and not only did we feature it on Monday’s post but I discussed it in studio with Jill Malandro at Voice of America on Monday afternoon – my trading gift to the World!

Remember, at Philstockworld, we are FUNDAMENTAL investors who use Options and Futures to both leverage and hedge our positions but beneath all of our trades are sound fundamental principles which guide our selections. Our premise on Natural Gas was, to me, so obvious, that we made it our trade of the year for 2016 and, as I said in Monday’s post:

Keep in mind the Natural Gas ETF (UNG) is our Trade of the Year and it’s very rare that you are still able to play our trades of the year this deep into the first quarter but you can still make the following trade:

Sell 10 UNG 2018 $5 puts for $1 ($1,000)
Buy 20 UNG 2018 $5 calls for $2.10 ($4,200)
Sell 20 UNG 2018 $9 calls for $0.95 ($1,900)

That puts you into the $8,000 spread for a net of $1,300 in cash, so the potential upside is $8,700. Your obligation, should UNG be below $5 (now $5.90 with Nat gas at $1.62) would be to own 1,000 shares of the ETF for $5,000 PLUS the $1,300 you put in (presumably lost if you don’t pull the plug early) so net $6.30 is more than the current price, so this is a very aggressive trade. The margin on 10 shorts is net $517.49 of ordinary margin so it’s a very efficient trade to have in your portfolio with a potential for a better than 4x return on cash+margin.

I know UNG isn’t as sexy as our usual trade of the year picks but there’s nothing unsexy about 200% annualized returns, is there? That’s why I’ve been banging the table on this one. Once people catch on to the fact that US exports of natural gas have nowhere to go but up – it’s not likely we’ll see these prices again.

UNG has already popped from $5.90 at Monday’s open to $6.45 this morning, up almost 10% on the week – so not bad, even if you are just playing the boring old ETF. The options spread we outlined above was a very easy fill as /NG opened lower (easy fill for our Futures trades too!) and, as of yesterday’s close, the spread was already at $1,780, up $480 (36%) per set in just 4 days.