Last year on April 19th, I issued a sale rating on natural gas. As I stated in that article, many individuals have asked me to publish my recommendations regarding natural gas on seekingalpha.com. I tend to resist publishing each time I buy or sale natural gas because often times I view it as a trade (defined as a holding period of one year or less) and I tend to be a long-term value investor. However, there are times that I fell the market simply gives us to great of an opportunity to pass up. In my opinion now is one of those times.
I was going to display various data points in this article but Sumit Roy of Hard Assets Investor published a good article today that shows much of the same data so there is no point in regurgitating the same data points. His article can be found at here. Also, today's natural gas report can be found at here.
My current recommendation for natural gas is to go short. I believe it has run too far and the market is caught up in current euphoria. I know and follow a handful of experts that trade natural gas for a living and all of them see prices coming down after the winter and I agree with them. There are many ways to short natural gas but focus on using ETFs, specifically (NYSEARCA:UNG), because most individuals reading this are retail investors and this is the easiest way for them to gain access to natural gas investing.
I view the best way to establish this position is to simply sale short the shares. Investors can also take synthetic positions using options. There are many ways to establish short positions using options but I will focus bear call spreads because I believe in managing risk. I will demonstrate using numbers from 2.19.2013. On the 19th you could go short April call options with a strike price of $28 for $1.41 and go long April call options with a strike price of $30 for $.91. In this trade your risk would be $1.50 (or $150 per contract) with a potential gain of $.50 (or $50 a contract) for a total potential return of 33%. Your break even price would be $28.50.
Past Recommendations on Natural Gas
- June 14, 2012: Buy at $3.36 BTU
- April 19, 2013: Close positions and remain neutral. By dips below $4.00BTU. Natural gas currently at $4.40 BTU.
- October 28, 2013: Begin buying at $3.74 BTU. Stopped accumulating shares on November 18 at $3.67 BTU.
- December 12, 2013: Began to close long position. By January 29, 2014 I had liquidated all my long positions and reversed into a short position. The short position was then 100% closed on January 31, 2014.
- February 19, 2014: Initiate new short position.