An interesting trade idea: Buy puts on the natural gas producers and calls on the natural gas tracker ETF UNG. This is very against any long term investing position I'd normally consider in the natural gas sector, since UNG has cost of carry and contango effects to deal with. But now may present a time window to take the opposite side of "common sense."
By the chart above, natural gas appears to have technically put in a bottom. As painful as the 15 or so month gas bear market has been, I have a hard time believing the "recovery" will be a pitiful few days. Of course, this might be a headfake since the fundamentals are still relatively lousy (despite being so well known). The announcement of the UNG ETF expansion alongside with increased transparency in CFTC COT reports have certainly helped the bullish case for natural gas. Regardless, contango is wide enough between the front months that those spreads have room to continue to close in. If they do, the UNG and any natural gas front month tracker will likely do well.
At the same time, the fundamentals of a natural gas producer stock are different, since they are priced off of future earnings of production as well as today's. A producer such as Chesapeake (CHK) is in the mid-28 price range, whereas 2 months ago it was in the 17s. That is a 65% price recovery.
During that same recovery period, a distant natural gas contract such as December 2010 has oscillated minimally in the 6-7 range. The trade here is based off the idea that CHK should be priced to longer term expectations of the natural gas market, not merely the whims of what is happening to today's gas. An earnings stream of 5 years of gas at $2.00 this year and $6.00 the following four years justifies reducing the relevance of the front month's volatility to a producer stock's price.
For context of long dated December 2010 gas (relatively unchanged) versus a producer like CHK (shown above):
Even Chesapeake's 27% move up during the last two weeks was accompanied by much less fireworks in the long dated gas. Clearly, there is multiple expansion and/or economic recovery getting priced into the broad equities market. This is of course affecting Chesapeake and other gas producers, probably explaining the bulk of this move (as opposed to natural gas price).
In the end, the fundamentals reign. If front month gas continues to move exuberantly, UNG (and CHK) will benefit. Entering this long UNG call / long CHK put trade is a limited exposure long natural gas play, one especially valuable in an already generally long equities portfolio. If equities decide to reverse, the portfolio will have some negative coverage in an already extended natural gas sector.
UNG is still trading at a 9% premium to its nav and between now and Sept-28th it will most probably start to dissapear because the fund may start issuing new shares then. So you will miss 9% of the move in nat gas prices via UNG. Be wary of UNG - for example today UNG shares were up 2.3% but it's nav was down 2.28%.... I have been trading UNG for a few months now and the ETF has become less and less reliable. Buyer Beware.
Interesting idea. To play devil's advocate, I would point out that reservoirs are over 90% fill, meaning that a lot of gas could get dumped on the market. Also, what if the winter is warm? Those calls could easily be a zero.
I'm still cautious of UNG. Yes, they have now officially announced that they are issuing new shares so the premium should disappear but how that process plays out exactly remains to be seen.
Right now we're just seeing a bounce / short squeeze in play which isn't over yet. Fundamentals of US gas remain unchanged though. Too much production, no more storage and winter that sticks to script and turns out to be mild and we will see a fresh new low once the current short squeeze shakes out.
I had a long term short on UNG, trailing stop triggered at 10.5, no position now as I'm not prepared to hold UNG long. Recent long on XTO, nice entry at 37, took profits at 39.5 and 41. Intend to move back to net short nat-gas when it gets to 3.5 territory.
If your read their filing closely it is pretty vague on how consistenly they would be issuing new shares but they did devote an entire paragraph warning investors that if they are buying at a premium there is a great chance they would lost that. I still trade UNG on a daily basis but I only enter a trade when the UNG shares are moving inline with nat gas and also with its underlying NAV. I also never hold overnight anymore.
I agree that this is probably just a technical bounce/short squeeze play also but i don't think we'll see the bottom again. That said I've come realzie what other people have told me - nat gas is extremely volatile and hard to trade. So I guess anything is possible. It's gonna be hard for them to brush off the ever increading probability that storage may be breached before the injection season is over though so we should see the price come down.
Unfortunately I was unable to short UNG because my broker didn't have any shares for me to borrow but it was such a beautiful short. I do have a short on CHK though @ 28. Good luck!
It's quite likely that the squeeze will kick on as punters see UNG's issue of new baskets as a green light to pile on, assisted by CNBC breathlessly parroting the gas/oil ratio.
But I see that as just more moths to the flame. Export facilities aren't sufficient to deal with surplus production, with storage maxed out, wells are just going to have to be capped. Without a huge pickup in local demand (which is possible if the govt mandates it), there should be a consolodation/shakeout in the industry with price weakness. Hell, the bigger producers seem to be actively cannibalizing.
BTW, that entry short 28 on CHK is *exactly* where I would normally make an aggressive short entry for the quick pullback. Didn't take it this time though, squeezing too fast with volume and I don't have a good feel for the bears on this one (not comfortable to pick the top). Hope you pinned it.
Yeah you're probably right. The other reason i wanted to short UNG was to play the premium gap because I knew inevetiably they would start issuing new shares again. Once that's gone shorts will cover.
I've been playing UNG for 3 months now - buying on the dips and selling into the report. It's been working like a charm. I have a feeling that's what's setting up to happen this week as well. I bought some UNG this morning because it looks as though UNG may rally into the report tmrw. But yeah the fundamentals are awful and there's no getting around that - nat gas has to trade down.
I have a tight stop in place for CHK just in case.... It's hard shorting anything in this market and i keep getting burned but continue to try.
http://ftalphaville.ft.com/blog/2009/09/15/72056/schork-nymex-natgas-is-a-bubble/
Tyler Durden - Founder
Marla Singer - Foil
Travis - Author
Cornelius - Author
Sacrilege - Senior Researcher
tips [ at ] zerohedge [ dot ] com - Our Reader Tips Mailbox
Make sure to read our "How To [Read/Tip Off] Zero Hedge Without Attracting The Interest Of [Human Resources/The Treasury/Black Helicopters]" Guide
ads [ at ] zerohedge [ dot ] com - Advertising Inquiries.
abuse [ at ] zerohedge [ dot ] com - Abuse / Infringement Issues
It would be very wise of you to study our disclaimer, our privacy policy and our (non)policy on conflicts / full disclosure.
Zero Hedge Offices:
United States:888.qui.zero (888.784.9376)Zurich:+41 43 501 6717London:+44 20 3318 4753
copyright ©2009 zero hedge - limited reproduction (with attribution) permitted by request
zero hedge's redundancy powered by:
Read Full Article »