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  • UNG premium - how UNG refuse the trend 0 comments
    Aug 27, 2009 2:26 PM | about stocks: UNG, NG

    I hope my english will be good enough to let you understand my point, and the point of some traders here commenting our arbitrage idea between UNG and NG futures.

    As we know, in this hot august 2009, due to some news that can justify such premium, UNG have seen raise its premium to 14,40% few days ago and as you can see in previous post today up to 18,20% because was trading at a certain point 4% better than the future that was falling.

    Now that I write you, the UNG is just doing 1% better this mean that lost 3% in few minutes. 

    Now consider that UNG is able to lose, let's say in 1 hour, 3% and people is still paying now 15,2% premium for a fund, close or not, that is just holding October futures of Natural Gas. 

    Ok people cannot access easily to futures and we can justify them that is more pratical to put in portfolio a stock that can be bought to any broker.
    But they should study and consider first the risk about what they are doing. 

    However we can justify them, because the bid/offer should already price a fair value and arbitragist and speculators should act to reduce this opportunity of a price that don't reflect the real value of assets (NYSE:NAV).

    But where those arbitragist are? Possible all in holiday? For sure not, but can happen you know, sometime Mr. Market give away money for free and let's hope this will be one of that.

    I imagine the worse scenario where UNG will trade at high premiums, I made some investigation and I found on thousands of etfs or let's say, hundreds.., just a dozen with a premium above 15/20%. Perhaps those are very often emerging markets funds, or small cap, where it's normal that investers have more difficult to replicate long holdings and/or arbitrages.

    I imagined so that UNG due to regulations will be forced to reduce investiments in NG futures diversifing in stocks correlated to gas/energy sectors and for sure this will mean that they will invest in liquid and US traded stocks that we could easily short and arbitrage again even the new holdings of UNG. Perhaps I never read a news like this but is the unique scenario can justify such premium.

    Some bank like CB and DB in their report have defined "irrational" the premium seen in UNG fund.

    And so on...

    So I think that to make an arbitrade to 18,2% premium can mean ok a risk to lose a 7/12% in case of premium above 25 or 30% but a nice profit if more time we will be able to sell the premium to 18% and buy to 15% and so on, or just to wait that it will reduce to a 5/2,5% level that could calm down all the mess this situation will create to investors. There is a lot of confusion for sure, with people that will realize soon if the prices of UNG will drop or it will not rally with the future in the next bull movements and they will start to study and ask in forums, blogs etc what's going on on UNG.

    I think a big percentage of UNG users still is not aware of what is happening and few have read about the premium UNG is trading.

    I will update you soon, we have 2 hours to the close of the market and will be curius to know what will happen.

    Just take a look to this chart, how in a candle of 5 minute you can see the future go UP and UNG etf to go DOWN because obviously refuse the trend and you know why.

    Disclosure: I do not have any position personally on this arbitrage because I already closed it at the moment I'm writing this article. I managed accounts however where we still are in position so long futures and short UNG. Thanks.

    Stocks: UNG, NG
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