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It’s been a bit cold in recent days and in most parts of the United States. That fact finally got recognized by headline scribes in need of a catalyst, as natural gas shot higher after striking fresh yearly lows in Monday’s session. It may have also had something to do with Russian PM Putin warning the ear of cheap natural gas is nearing an end due to much needed multi-billion dollar investments to develop the industry.

Whatever the motive behind Tuesday’s bid, the action was reflected in both the US Natural Gas ETF (UNG) and its options as well. In fact, in an otherwise mostly disappointing market red sleigh ride lower, UNG was a standout. Shares themselves tacked on a decent 7.25% on seasonally strong volume. That being said, the reversal attempt from a pattern I’ll describe as a false lateral breakdown, did find initial resistance at its 20-day moving average.

The 20-day moving average is an important one as it’s contained the bulk of the downtrend off the July highs. The line has been broken ever-so-briefly on three separate occasions, as bulls “ho-ho-hoping” for a resumption of the prior and once hot uptrend, failed to maintain the faith.

Could this time be different? Well it’s certainly not impossible. All trends do end in fact, even the ones which burn out as bankruptcies. Further, the persistence of the current spiral lower is as severe as the one which had bulls in rapture less than six months back. That tenacious behavior in both directions can be best appreciated by looking at the weekly chart and the 10-week moving average shown below in Figure 1. Technically, an oversold RSI 14 and a bit of narrowing of the lower Bollinger Band look to favor a floor in prices as well.

 

Figure 1: Weekly US Natural Gas ETF (UNG)

On that somewhat jolly note, option bulls also appear to have been busy positioning with further upside in mind. One caveat is that’s not exactly a new trait by investors. On the day, nearly 15,000 contracts changed hands versus a daily average of 5,800. Of the volume, call activity kept to its role of crowd favorite by a wide and near four-to-one margin versus a still-high and typical three-to-one advantage.

 

Figure 2: US Natural Gas (UNG) ATM Implieds

Most active on the day were the now slightly out-of-money January 24 and 25 calls with totals of 1,124 and 1,286 respectively. Those options closed at $1.45 and $1.10 on implieds near 62%. The premium appears steep relative to its statistical volatility. Related, that same movement has resulted in UNG forging tight lateral consolidations within its existing downtrend and making the purchase of outright premium (particularly calls), a difficult affair.

Further, while January has just been introduced as the front month, there are just 23 days left and more than a few of those being prone to a possible holiday-induced price coma. In saying that, any interested bulls may want to consider verticals, diagonals or other spreads which reduce some of the directional and vega risk price risk. Those strategies still realize profitability in the advent a meaningful low in UNG does occur. Spreads also help ensure against option-related damage if the still-existing “Buy, Buy, Buy!” action turns its sights towards “buying write or better” during a potentially less volatile 2009. 


Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

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