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Sell Natural Gas Into Resistance

Right now, we have a greater supply but even greater demand. Once demand tapers off from warmer weather, we can expect the price of UNG to do the same. Natural gas demand is rising from other uses, including electrical generation and wider use as a transportation fuel, but that won't maintain the current average spot Henry Hub price that has spiked in the last three months.

You can gain exposure shorting natural gas by shorting shares of UNG or through the options. I prefer options because you can dial in the exact amount of risk you want. In my world, I focus on risk first and profit potential second.

One example that I am currently reviewing is to sell a bearish credit spread. A bearish credit spread allows me to capture time decay while I maintain control over my risk, regardless of potential geopolitical events.

I can sell a July $22 call option for about $1.90 and buy a July $26 call for about 45 cents for a net credit of $1.55. Because UNG was trading for about $23 a share as I typed this, if UNG remains unchanged at the time of expiration, I make a profit of about 55 cents, because the call is currently in the money.

If UNG falls below $22, as I believe it will, I can make a total of $1.55, and if everything that can go wrong does, the most I can lose is $2.45. I like the idea that the market has to move significantly against me before I will start to lose money in the trade.

At the time of the publication, the author did not hold any positions in stocks mentioned.

Follow @RobertWeinstein

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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