by Tyler Craig | February 4, 2014 9:19 am
With stocks on the ropes and many uptrends now broken, bullish opportunities seem to have dried up in stock land.
Fortunately, some commodities are catching fire as bulls migrate to other areas of the trading sphere. The United States Natural Gas Fund (UNG) in particular is sitting pretty. Let’s zero in on natural gas to see if there’s a good trading opportunity.
Since bottoming in late-October at $16.91, UNG stock has staged quite the comeback, rallying as much as 60% to a new multi-year high. The newfound uptrend has been accompanied by a notable uptick in volume, suggesting that big money has been piling into the natural gas arena.
UNG’s latest pullback has lowered the natural gas ETF to a much more appealing buy point, near a prior breakout area at $24. Even if this level fails, a number of other support zones lurk beneath, which should stem any further decline.
Turning to the derivatives market, we see quite the surge in implied volatility (IV) for UNG options. Since the beginning of the New Year, IV has more than doubled. UNG stock has been bit by the volatility bug, which means option prices are more expensive than at any other time in the past couple years.
Given the mean-reverting nature of volatility, it’s much more likely that IV falls back from its current levels rather than continuing higher. With that in mind, selling options on UNG stock seems to be the way to go here.
Source: Livevol Pro
Traders anticipating additional upside in UNG stock over the coming month could sell a monthly Feb. 23 put for 70 cents or better. Consider it a bet that UNG remains above $23 by Feb. 21. The max reward is limited to the initial 70 cents credit.
By selling the put, you obligate yourself to buy 100 shares of UNG stock at $23. Since you receive 70 cents for taking on this obligation, however, your cost basis would drop to $22.30. If you’re a willing buyer of UNG stock at these lower prices, the short put play sets up a potential win-win scenario.
If UNG sits above $23, you pocket the 70 cents. If it heads lower, you simply get the opportunity to buy it at a pretty good discount to current prices.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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