It looks like I hit the nail on the head once again with a major short position in the United States Natural Gas Fund (UNG).
After my followers bought the July, 2014 $26 puts at $2.16 on Monday, the (UNG) suffered its worst trading day since 2007, the underlying commodity plunging a breathtaking 11%. The puts roared as high as $3.05, a gain of 42% in mere hours. I wish they were all this easy!
If the (UNG) returns to the February low of $22.50 in the near future, you can expect these puts to soar to $5.00. That?s an increase of 130%, and would add 6.53% to our 2014 performance. Please pray for warmer weather, and dance your best weather dance.
It took a perfect storm of technical and fundamental factors to trigger this Armageddon for owners of the troubled CH4 molecule. One of the coldest winters in history produced unprecedented demand for natural gas.
This happened against a backdrop of a long term structural conversion from coal and oil fired electric power plants to gas. Not only is natural gas far cheaper than these traditional carbon based fuels, burning it generates half the carbon dioxide and none of the other toxic pollutants.
The result for traders was one of the boldest short squeezes in history. The incredibly $6.50 Monday opening we saw in natural gas, and the $28 print for the (UNG) was purely the result of distressed margin calls and panic stop loss covering.
At one point, the February natural gas futures, set to expire in just two days, were trading at a 40% premium to the March futures. Extreme anomalies like this are always the father of great trades.
The extent of the industry short position is evident in the cash flows in the underlying exchange traded notes (ETN?s). As prices rose, the long only (UNG) saw $366 million in redemptions, about 36% of its total assets. The Natural Gas Fund (UNL) has lost more than a third of its capital.
On the flip side, the Velocity Shares 3X Inverse Natural Gas Fund (DGAZ) pulled in some $449 million in new investors. Since the rally in natural gas started in November (DGAZ) has cratered from $18 to $2.5. This is why I never recommend 3X leveraged ETF?s.
This all adds currency to my argument that the natural gas revolution is bringing the greatest structural change to the US economy in a century. The industry is evolving so fast that you can expect dislocations and disruptions to continue.
The current infrastructure reflects the state of the market a decade ago and is woefully inadequate, with a severe pipeline shortage evident.? Gas demand is greatest where supplies aren?t. Infrastructure needed to export CH4 abroad is still under construction (see my piece on Chenier Energy (LNG) by clicking here).
The state of North Dakota estimates that it is losing $1 million a day in tax revenue because excess natural gas is being flared at fracking wells for want of transportation precisely when massive short squeezes are occurring in the marketplace. Needless to say, this is all a dream come true for astute and nimble traders, like you.
The question is now what to do about it.
I just called friends around the country, and it appears that a warming trend is in place that could last all the away into March.
It is time to get clever. It would be wise to enter a limit day order to sell your $26 puts right now at the $5.00 price. Since the first visit to these lower numbers usually happens on a big downside spike, the result of stop loss dumping of panic longs accumulated by clueless short term traders this week, you might get lucky and get filled on the first run.
These happen so fast that it will make your head spin, and you won?t be able to type an order in fast enough. If you don?t get filled keep reentering the limit order every day until it does get done, or until we change our strategy.
This has been one of my best trades in years, and it appears that a lot of followers managed to successfully grab the tiger by the tail.
Good for you.
