UNG: The Effects of Contango

Oct.15.09 | About: The United (UNG)

I have very little to say here as a picture is worth a thousand words.

If you have followed my posts and comments, or those of many more knowledgeable Seeking Alpha participants, you are by now aware that UNG has changed the way it attempts to accomplish its goal to avoid possible CFTC limits. You are also aware of the issue of negative roll yield during periods of contango.

These issues have been described, but the words you have read may not have had as dramatic an impact as the below image.

The below partial "snapshot" of this UNG Daily Holdings web page, on Wednesday 10/14 at 21:16 EDT, tells the whole story. Note that it changes daily, so the contents may vary depending on when you visit the page.

(Click to enlarge)

UNG Positions and Pnding Trades 10/14/2009 21:15 EDTClick to enlarge

Do the math and note the reduced number of positions after completion of the next three roll periods (hint: -7,955?). On a part of the page above that is not shown in the "snapshot", the total holdings after the first roll day was completed are 180,960 positions. If price ratios remain unchanged over the next three rolls, the net positions will decline a further 4.4%.

To add insult to injury, the November futures contracts (the current UNG position being exited) has begun the expected price decline and the December contracts (the position being entered) are also declining now, albeit more slowly than the November contracts. If the futures contract prices continue to decline, UNG will again own fewer contracts which are declining in value at the end of the roll period.

While writing this article, I checked the previous session contracts. November showed a -$0.152 decline to 4.436 and December showed a decline of -$0.118 to $$5.357.

Prior to the start of roll, the NG:UNG price ratio was 2.39:1. After roll is completed, if nothing else changes, we can expect 2.285:1.

Note that this is also options expiration week and that can have an effect on UNG prices if short covering is in play.

Go to the Nymex Natural Gas current session contracts to see current prices. You can also select the previous session to see what prices were at close of the previous session. Click on one of the contracts to bring up a chart, which can be used to show various intervals.

Premium paid at end of 10/14 was +3.77% (NAV $10.60, market closing price $11.00).

The new prospectus is available from the UNG website in PDF format under the Literature drop-down menu.

Disclosure: long UNG, short covered calls, long synthetic short positions.