I have suggested in a previous article that natural gas and the associated ETF (UNG) had become very volatile. I had argued that it wasn't a wise thing to try to predict the direction of the moves in UNG in the short-term. However, I suggested that there was a lot of money to be made from trading the volatility of natural gas.
I suggested the below options trade, which is hedged against market moves, on July 19th' 2012 and the trade is up an annualized 246% as the natural gas has rallied very aggressively.
Buy UNG August 17th' 12 17 Call Options for $3.45 and UNG August 17th' 12 22 Put Options for $2.35
Of course the call side of that trade has been largely profitable while the other side went through some losses.
In my previous article, I had argued that if UNG moved very aggressively to one side, the side of the options trade that became very profitable should be sold to realize profits. In addition, since much of the cost of the puts in this case are already paid off by the profits from the call options, investors can hold the puts with virtually no downside risk.
Natural gas has been trading in the upper side of a trading range, as of this writing. As a result if UNG can't breach the trading range and makes another large move to the downside, the put options will recover their losses and turn profitable, making the overall trade extremely profitable.
Investors should be able to sell the August 17th' 12 17 call options for $5.13 as of this writing which will cover almost the entire cost of the initial trade which was $5.83
In a separate note, it might also be wise to put on a long oil (USO) trade, hedged with a short UNG position. If the ECB makes good on its promise to intervene in the Eurozone situation oil will rally much more than natural gas. In fact, natural gas might move down on such a bullish move in the markets as many of the natural gas rallies seem to have gone along with market weakness recently. For investors who are more risk averse, the above options trade is a better choice though, since it is hedged against market moves.
Investors who find my trading suggestions of good quality can use the "Follow" feature of SA to get further articles about the natural gas trade mentioned above. I will also try to post about other trading opportunities if natural gas prices remain volatile.