The above image was taken from Atilla Demirays Twitter account here.
With the caveat that you can make a graph and statistics look as benign or ominous as your intentions desire, it is interesting to see the ratio of insider buying activity relative to SPX chart.
Perhaps it is confirmation bias, but this is a snapshot of why I’m largely sitting in cash and selling spreads and collecting premium on volatility.
Finding legitimately undervalued individual securities is very difficult for me at the moment. Combing the trash heap is not very productive for now.
For the last several weeks I’ve combed through everything I could find on natural gas. Peer reviewed papers, technical articles, blogs, and so on.
I concluded that I wanted to get long.
But how? What method?
I am long DVN and APC. I’ve traded CHK and am now sitting on a small amount of calls. None of those are pure NG plays.
The oil and gas E&P’s seem to live and die by oil overhang with natural gas displaying minimal relative influence.
The easiest way to get long on NG, beyond companies with nat gas interest, is to buy the common on UNG. As with buying the common on anything, with this strategy I would sell deep out the money calls or spreads against my position to gradually lower my cost basis. My stop loss is loose enough to tolerate normal volatility but tight enough to minimize losses if a material change occurs in the NG arena.
A few indicators to assist with setting an exit for the common from Barchart.
Yearly R2 20.86
Yearly R1 14.77
Yearly Pivot 10.84 —
200 SMA/DMA 9.13
Monthly R2 7.86
Monthly R1 7.39
Day High 7.06
Day Open 7.01 o
Weekly R2 7.01
*Last Done 6.94 << Last Trade
Monthly Pivot 6.91 —
Weekly R1 6.9
5 SMA/DMA 6.90
20 SMA/DMA 6.89
Day Low 6.87 \/
Weekly Pivot 6.78 —
Weekly S1 6.67
50 SMA/DMA 6.67
Weekly S2 6.55
Monthly S1 6.44
Monthly S2 5.96
Yearly S1 4.75
Yearly S2 0.82
My view is if a stock heads measurably down then it is better to reassess, exit, and enter at a lower point than go with the drag down for significant losses.
If you buy UNG then it has to be for the long haul.
Another vehicle for going long NG is buying at the money calls.
You could sell at the money puts and create a synthetic long position.
Volatility is neither historically high nor low on NG currently. Call it…historically moderate.
The problem with a purely derivative play of UNG is the limited time horizon. I could roll the position as each long call entered around 9 months out, but there are disadvantages and risks there. I’d get to watch about half of my premiums decay as I roll out a LEAP while waiting for NG to come back.
Regardless, UNG is designed to mirror front month futures contracts so contango is inevitable.
I could go long a natural gas futures contract. This has the biggest risk reward pay off. But that’s a bit too much for me currently. I’m bullish, but futures orders are marked daily. Lots of risk for an incorrect play.
I could go long futures options on the underlying contract. Here I’m only out whatever premium is paid. The problem here is that open interest and volume is non-existent once you move a few months out. Its very difficult to get a good B/A spread when no one is trading the product.
And volatility isn’t exactly low for any of the long options plays.
I could write spreads on any of the aforementioned, but futures requires too much monitoring for someone with a very involved day job.
I went long UNG today at 6.91. Over the long term, I am bullish on natural gas.
I have an ongoing write up, to explain why, that I hope to get out sooner rather than later. You can’t exactly explain the natural gas case in just a few pages.
The common allows me to collect premiums selling OTM writes against the position and makes my time horizon for a rebound in NG indefinite.
I may still go long NG Futures Options, but that will be heavily dependent on what sort of B/A I can get.
As always, the above is not exhaustive. Not even close. You could go long the 3x velocity ETF, you could do any number of spread strategies with the derivatives vehicles. The point is, if you have a very long time horizon, natural gas is a valid play from here.
Barrons says don’t get long yet (They are speaking to futures speculators)
Forecasting Natural Gas Prices Using Wavelets, Time Series, and Artificial Neural Networks (Note I could not find the article I read by the same name open source, but this is a PowerPoint given by one of the authors of the original article)
I am reviewing palladium and Micron as a new long and looking for methods to short the overall.
There are a couple interesting large cap propositions sitting at 52 week lows.
As always, do your DD and invest wisely.