GAS GLUT RUT
New Trade Alert for (UNG)
Natural Gas Exchange Traded Fund January $5.00 Call @$1.85 or less
Risk Rating: 2 (1 = lowest 5 = highest)
Above Break Even Probability: 44%
Asset markets have turned with stocks stabilizing as the broad market S&P has surged 10% off the February 52 week lows just three weeks ago. The performance push above the 1950 resistance targets a technical objective of 2100 in the SPX.
Beaten and battered commodities starting with Gold are on the upswing with the midas metal at one year plus peak. Oil is breaking out with a push above $36 a barrel with the same double bottom as seen in equities.
The hits keep on coming in the crushed commodities…Coal, Copper, Aluminum, and Iron Ore have all reversed from massive losses.
One real asset has yet to stop the free fall…Natural Gas has fallen from $50 in 2011 to $5 and change last week. A squeeze ala other assets could catch stubborn shorts.
An ample supply has the market headed south for the mild winter. REMEMBER that half of electricity produced in America not comes from Natural Gas so the hot season ahead could see increased energy demands for air conditioning…
The UNG Natural Gas ETF has Bullish divergence with no new highs in volatility on the price plunge may suggest sellers have tired.
UNG traded sideways from $7 to $9 in the last three months.
The first objective is the channel top at $9 which stands 50% above.
In a larger sense a breakout of the trading range targets $11 last seen in October.
The Options Way: Unlimited Upside Potential with Limited Risk.
A UNG long call option can provide the staying power for a market upturn. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months and strikes. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability.
The Delta is a measurement of how well the option reacts to movement in the underlying security.
It is important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent large price explosion.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability.
That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options is more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With UNG trading at $6.00, for example, an In The Money $5.00 strike option currently has $1.00 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need.
Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop.
Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the UNG January $5.00 Call at $1.85 or less.
This option strike gives you the right to buy the shares at $5.00 per share, below decade plus lows, with absolutely limited risk.
The extreme low was at $5.78 last Thursday therefore this option can let you buy in at a major discount.
The January option has nearly eleven months for any BULLISH recovery. A 72 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $185 or less paid per option contract. The upside is unlimited.
The UNG option trade break-even is $6.85 at expiration ($5.00 strike plus $1.85 or less option premium). That is just 75 cents or so above the current Gold Miners ETF price.
A push back inside the multi month trading channel has resistance at $9.00 as the first upside target At that modest level the option investment would gain 100%+ to $4.00.