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The United States Natural Gas Fund ETF (UNG) has undergone two reverse stock splits (2:1 and 4:1) and could very well be heading toward a third in 2013.

UNG as of the 4/13/2012 close was at $14.90 NAV and owned 1/2 May 2012 Natural Gas Futures at $1.981 and 1/2 June Natural Gas Futures at 2.084.

It will finish the roll on Monday and Tuesday at roughly a 5.2-6% contango cost/decay.

The destructive powers of contango have been written about by others as well as myself (in prior articles on UNG and USO) so I will not go into the details of the mechanics.

What investors more than likely forget to check is the long-term contango UNG will face as they trade it over the short term. The bigger and easier trades are to be bearish on UNG over the long term due to contango decay and seasonality price movements in natural gas.

Right now, if UNG rolled from June Natural Gas Futures at $2.081 to October Natural Gas Futures at 2.421 investors would have a 16.34% decay. This is in my opinion likely to grow larger or that UNG will actually have a higher roll cost than 16.34% for the monthly rolls from June through October.

What is even worse is if you look out further on the curve to January Natural Gas Futures, which traded at 3.225. This means that UNG would have a 54.75% contango roll through December 2012 as the market currently prices it.

If natural gas prices in the fall were to revert to the current price of 1.98 when UNG is holding October Natural Gas Futures, UNG would be trading at $12.50 if the contango stayed the same at 16.34%. If it were to grow to 30% contango over the same period, UNG would be at $10.49.

The problems in the natural gas market right now are many and the possibility of much higher prices this summer and into the fall seem like an extreme long shot.

While single digits in UNG this fall are a mid-probability (30-50%) they are a high probability (50-75%, outside of abnormal events) to occur next year during the spring.

I am not saying that we won't trade higher and see Natural Gas Futures in July above $2.30. We could see this happen but if UNG is already owning $2.30 gas it won't get to participate that much in a move up.

What I am saying is that when a rally occurs in UNG it is to be either shorted or enter into bearish option plays on it as UNG is likely to be in single digits by the Spring of 2013.

There are a ton of option opportunities in UNG that I will be writing about in the weeks ahead that allow one to play out on this view.

Disclosure: I am short UNG. Overall net bearish on UNG via options.

Source: Sub $10 UNG Is Coming To A Market Near You