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Danny Devito
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  • UNG and NG arbitrage - my today gain 2 comments
    Aug 27, 2009 3:00 PM | about stocks: NG, UNG


    This is an example of my today portfolio.

    At 18% premium of UNG I began to make some trade, so long mini natural gas future and short UNG for around 8000 USD. I'm closing the day so with a profit of around 140 USD.
     

    Let's do some calculation. Let's imagine that UNG will arrive to a premium of 60% like in the most higher premium found in EtfConnect.com and that any arbitragist, hedge fund, Soros etc... will act to stop this "irrational" premium.

    So I will bet 1% of my portfolio each time the premium will increase of 1% or 2,5%. In the case of 1% when the premium will arrive to 60% will be into with around (60-15) 45% of my capitals. To lose everything the premium should arrive to 250%.

    There is so a theorical risk to lose everything.
     

    In the mean while I will try to enter and exit how many times I can when I've a profit with one of those position and I will hope that if the premium will arrive at 60% (I will have an average of my arbitrage so around (60-15)/2+(60-15) 37,5% that a day it will come back at 37,% so I will reduce 50% my positions and short again if premium will raise again.

    And so on...
     

    Now imagine because you know how the premiums work in ETFs especially that ones liquid like UNG, USO etc... that each speculators, hedge fund, retail investors with some good platform (thinkorswim, interactive etc etc) will want to do this spread because see the potential of an easy profit. (disclosure: it's just my speculative view point, nothing else, take care to study this arbitrage carefully in its risks). You can imagine how many millions or billions are ready to spread/arbitrage continously in the next hours, days or weeks UNG and futures?

    I just "feel" that something will happen soon, and I don't take care if the premium will raise and for me it's better will raise and that I will lose some money now but I will be with bigger position in few days because as I said in previous posts, this premium is able to go down of 3% in a single hour, so imagine when some news in TV, some big speculator will put some big strategy on it to reduce definetivelly this premium.

    To UNG stakeholders I can just give a tip to buy futures, is in their interests! they can save money and risk to buy something more cheap. Depend just from them, if they will act in their own interests thei will lower the premium and they can bet to know that the premium will lower. Or they can continue to leave the things like now, but then what sense it have? I don't know, so the unique think I have to do is some calculation about probability, to foreast where I can risk to see this premium and my potential loss. Where to close in profit will be an easy problem to solve, what we don't know is the future about the premium and what's going on.

    Remember that we are in holiday season still and something could change soon as Septmber arrive. Why? I just suppose, I can't be sure of course, that's why I prefer to call this trade a "bet" and need to be taken however as a risk and not an easy trade, can pass several days, weeks or months may be to see a decent profit if something will go wrong in my view.

    Disclosure: I'm long 1 QG future and short of UNG shares for the same USD value or so.

     

    Stocks: NG, UNG
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Comments (2)
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  • finance consultant
    , contributor
    Comments (3) | Send Message
     
    Danny

     

    You are incomprehensible
    3 Sep 2009, 07:45 PM Reply Like
  • Danny Devito
    , contributor
    Comments (85) | Send Message
     
    Author’s reply » Thank you (:-)))

     

    Why is so hard to understand. I'm just asking if there is some rule in the case UNG is liquidated.

     

    I'm short 75.000 shares, and with a premium of 18% if they liquidate the fund... the liquidate to the NAV value ok?

     

    So who is long, without do nothing, if they don't sell in the last trading day the UNG will pay them the NAV value as the fund cease to quote/trade.
    (When they receive the NAV value is like they "sold" to that value).

     

    I'm short! Can I leave my position and wait so they liquidate the fund and I will receive the NAV value like for who is long? Or there is some rule that force short selling to covert position and they have time till the last trading day?? this mean that if all shorters will need to do so the last day we will have an huge premium.

     

    Volkswagen stocks went up from 200 to 1000 eur in few days (capitalization of 300Billions and sending up the index of 10% in a single day because was influencing of 28% at that level of capitalization) just because of shorters were not able to find sellers and to cover the shorts and Porsche was doing some sort of strategy to let them run...

     

    So I just want to know this to be sure to don't commit errors in the arbitrage and to be safe in the case of UNG liquidation, I mean, shorters will be very happy because the premium will be eliminated in full.
    3 Sep 2009, 07:53 PM Reply Like
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