UNG/Ernest - Well, UNG is our Trade of the Year, though off to a bad start (as Trades of the Year sometimes are). While we are long on the Futures (/NGK6 May contract at $1.87 at the moment, now $1.82), our long-term outlook for Natural Gas is it rises to about $3 as our exports pick up over the next year or so. That's up 50% from here so UNG, at $6 now, should be around $9 but ETFs decay so we're playing it conservatively.
There's no reason to buy UNG - they don't pay a dividend. You can artificially buy them by setting up a bull call spread:
- Buy 10 UNG 2018 $5 calls for $2.25 ($2,250)
- Sell 10 UNG 2018 $9 calls for 0.95 ($950)
That spread puts you in for net $1.30 ($1,300) on the $4 spread with a potential gain of $2,700 (207%) if UNG hits $9. There's no margin requirement so you tie up just $1,300 of your cash rather than $6,180 if you bought 1,000 shares of UNG and UNG would have to hit $8.88 for you to make the same $2,700. Certainly I'd rather tie up just 20% of the money on essentially the same trade (and the downside is limited to $1,300, of course).
Now, if you want to get fancy, since you are willing to own UNG, you can also sell the 2018 $5 puts for 0.90 and that drops your net by $900 to just $400 cash on the $4,000 spread and your worst case is that UNG is below $5 and THEN you own it for $5,400 ($5.40), which is like getting a 12.5% downside buffer for free.
That's the way we like to play it. With the added put sale, the same 1,000 shares you were going to spend $6,180 on become 10 contract spreads you spend $400 on and TOS says the margin on 5 UNG 2018 $5 puts is just $517.50 - very margin-efficient and your break-even is $5.40 on UNG, that's way better than buying the stock.
