Buy Alert: January 31, 2014

| January 31, 2014

Buy Alert:  January 31, 2014


Option Strategy:

Buy US Natural Gas Fund (UNG) April 2014 $23.00 Puts for $1.65 or better.


Commodity Outlook: Natural Gas

Folks, this week’s spectacular run up in natural gas prices was undeniably remarkable.  As you’re likely aware, the commodity surged to $5.50 mmBtu on enormous volume this past Wednesday.

But here’s the deal…

The jump had all the signs of a short squeeze.

In other words, a hedge fund or some other institutional trader was likely caught short the natural gas market and forced to cover the position at any price. 

When squeezes like this occur, it can take the market to price levels that are simply not justified.  Case in point, natural gas fell 10% on Thursday, erasing most of the unwarranted gains made the previous day. 

And the commodity will likely continue weakening into Spring…

In fact, the NOAA is already predicting a warming spell for the East Coast over the next 6-10 days.

To further capitalize on weakening natural gas prices into Spring, let’s buy another round of puts in the US Natural Gas Fund (UNG).  When natural gas falls, so does UNG.

Here are the important details you’ll need for this trade…


Trade Metrics:

Underlying ETF Symbol: UNG
Call or Put: PUT
Expiration Month, Day, Year: April 17, 2014
Strike Price: $23.00
Current Bid/Ask Price: $1.54/$1.57
Maximum Buy Up To Price: $1.65
Maximum Risk Per Contract: $165.00

 Here’s a breakdown of the important technical support and resistance zones in Natural Gas…

Natural Gas


Exit Strategy:

Remember, we want natural gas to trade lower.  Our first profit target is $4.50 mmBtu.  As the winter heating season draws to an end in March, we should see the commodity drop into the low $4.00 range- and possibly lower.  

The risk control price is $5.60.  If for some reason natural gas rises above that level, conservative investors should consider closing this trade to reduce risk.

Until next time,

Justin Bennett

***Editor’s note***   Remember, keep your other natural gas put position open.  The expiration month for that trade is also April, so we have plenty of time for those contracts to get back in the money!


Category: Commodity Trading