Sunday, May 24, 2009

Natty Gas Naked Puts

Since highlighting the strong breakout within Natural Gas, we've seen a significant retracement. Ideally I like to see an uptrending stock retrace between 38.2% and 61.8%, so witnessing the UNG retrace over 75% of it's prior swing does temper my enthusiasm a bit.

However, for those still somewhat bullish on the Nat Gas space, this retracement can be viewed as another opportunity to enter bullish plays. Let's explore a conservative naked put sell.

UNG @ $13.70
Sell the June 13 put for $.60
Max Reward = $.60
Max Risk = $12.40
Breakeven = $12.40
Initial Margin Requirement = $3.32
ROI = 60/332 = 18%
Keep in mind your broker's margin requirement may deviate from mine and the the margin requirement may rise if the stock drops.
Trigger: You many want to wait for UNG to stablize and start to bounce before pulling the trigger.
Here is the risk graph:

Best case scenario: UNG remains above $13 at June expiration (3 weeks), the put expires worthless, and you keep the $.60 premium

Worst case scenario: UNG resides below $13 at expiration, causing you to purchase 100 shares at a cost basis of $12.40. Given that $12.40 is BELOW the current 52 week low in UNG- it doesn't seem that bad of a price to be long UNG
Tyler-

4 comments:

financial services said...

I would like to commet about natural gas. The price of natural gas in down by 75% over the last four years. Their is an exchange traded note that tracts the price of natural gas using futures contracts. It trades under the symbol {GAZ}

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Mike said...

Here, The price of natural gas in up by 75% over the last four years. Their is an exchange traded note that tracts the price of natural gas using futures contracts.Thanks!
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