If there is one thing we seem to have in abundance these days it is natural gas (heretofore referred to as NG). Thanks to technological advances in drilling the U.S. has become the world leader in producing, using and exporting NG.
If you understand anything about supply and demand you can probably guess the affect that this massive supply of NG has had on the price of NG. If you have any doubts peruse Figure 1.Figure 1 – Natural Gas spot futures (Courtesy ProfitSource by HUBB)
The futures market price for NG gas has plummeted from over $15 to a low under $2 in the past 10+ years. As you can see in Figure 1, NG prices are languishing in the $3 range.
Truth #1 is that I am not really a “fundamentals” kind of guy, but I am guessing that the fundamental outlook for NG is still pretty negative.
Truth #2 is that regardless of Truth #1 I am sort of a sucker for a long, drawn out base, a consolidating and narrowing trading range and a potential multiple bottom. I look at the chart in Figure 1 and “I think I see a bottom forming”. Granted, not the most sophisticated approach to finding a potential opportunity but, hey, I am who I am.
I also look at Figure 2 and see an Elliott Wave count from Profit Source by HUBB that suggests that NG may have completed 5 waves down. Implication: the next move should (could?) – at least in theory – be to the upside.Figure 2 – Natural Gas spot futures with Elliott Wave count (Courtesy ProfitSource by HUBB)
The reality is that trading NG futures is not on the radar for most traders. So let’s take a look at ticker UNG which is an ETF designed to track the price of NG but which traders can buy and sell like shares of stock.Figure 3 – ETF Ticker UNG (Courtesy AIQ TradingExpert)
Note that UNG also appears (at least in my market-addled mind) to be forming a multiple bottom and consolidating into a very narrow range of late.
The Seasonal Effect
For many years the period extending from the end of September Trading Day #1 through the end of October Trading Day #21 was a quite bullish period for NG. However, as you can see in Figure 4 – under the category of “what have you done for me lately” – the answer is “not much”. The bullish Sep-Oct effect has been essentially non-existent during the overall NG swoon of recent years. Still, for the record, this period has seen NG rise 20 time and decline 7 times.Figure 4 – Long 1 NG futures contract close of September Trading Day #2 through October Trading Day #21 (1990-2017)
Still, it is possible for a stubborn trader with a hankering to speculate on something he thinks he sees (“Hi, my name is Jay”) to convince himself that NG is bottoming and that – fundamentals be darned – this “seasonally favorable period” is as good a time as any to take a flyer on NG.
Clearly, this is not “bet the ranch” territory. In fact, this might not even be a good idea at all. In situations like this the best question to ask is NOT “will I make money” but rather, “how can I take a shot without risking much money?” One potential answer is via the use of UNG options.
UNG Calendar Spread
As always, what follows is not a “recommended trade.” It simply represents an example of “one way to play” a situation where you are engaging in rank speculation. The trade detailed involved buying 10 Jan2019 8 strike price calls and selling 8 Jan2018 8 strike price calls.Figure 5 – UNG Calendar Spread (Courtesy www.OptionsAnalysis.com)
Figure 6 – UNG Calendar Spread Risk Curves (Courtesy www.OptionsAnalysis.com)
Things to note:
*The cost to enter and the maximum $ risk is $478.
*There are 141 days until January 2018 option expiration, which means that NG has four and a half months try to rally/pop/meander higher
*The trade does have unlimited upside potential because we are long more calls than we are short
*If NG can move to higher ground time decay will work in our favor as the January 2018 call that we are short will start giving up its time premium much more quickly than the January 2019 that we are long. In other words, if NG does move higher and then gets stuck in a range, profits will steadily increase.
*The record low for UNG was $5.78 a share in March 2016. If we arbitrarily set $5.50 as a stop-loss point and exit the trade then, the maximum likely risk is somewhere in the range of -$300.
Is speculating on the long side of NG even a good idea? Maybe. But maybe also quite possibly maybe not. So let me be clear. We are not taking about “wise long-term investing” here. We are talking about “rank speculation” based on:
* A market that clobbered and has been trading sideways in a narrow range for close to 2 years (i.e., just maybe building a base)
*A potential end to an Elliott Wave downward count
*A market consolidating of late into a very narrow range (i.e., possibly coiling for the next big move)
*A potentially favorable seasonal period
*The ability to enter a trade with good upside possibilities (unlimited upside, profitability improves with the passage of time, relatively low dollar risk)
“Speculation” is not a four-letter word. Nevertheless, it has to be done right. And even if it is done right there is still a high degree of risk of loss.
Hence the use of the word “speculation.”
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.