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Put Sellers See Bottom in UNG

We see upside potential in the U.S. Natural Gas Fund, and will be initiating an unbalanced butterfly call spread.

U.S. Natural Gas Fund (UNG) - Get United States Natural Gas Fund Report traded heavily on Friday, with investors selling-to-open 6 strike puts. The October 6 contract was the most active. More than 75,000 traded and 92% traded on the bid, suggesting sellers were dominating the action. Open interest increased by more than 60,000 to 113,000 contracts, and is now the largest position in the gas fund.

September 6 puts saw similar action. Natural gas prices have been under pressure for the past few months, falling from $5.33 in mid June to $4.81 Friday, or 28.7%. These put sellers might be calling a bottom in the ETF, which tracks natural gas prices through futures. In other words, they might think that natural gas prices will heat up heading into the colder winter months.

We also see potential for upside (December natural gas is up $0.06, at $4.07, at the time of writing) and will play it with a UNG January 7-9-10 unbalanced call butterfly for $0.25, or better. It is somewhat of a speculative play, with an upside break even at $7.25, and a potential profit of $1.75 if UNG settles at $9.00, at the January expiration. UNG is up $0.16, at $6.40, at the time of writing.

Trades: Buy to open 10 UNG January 7 calls for $0.55 or better, sell to open 20 UNG January 9 calls for $0.20 or better and buy to open 10 UNG January calls for $0.10 or better.

At the time of publication, Henry Schwartz held no positions in the stocks or issues mentioned.

Henry is the president of Trade Alert LLC, a provider of real-time options analysis tools to leading Wall Street firms. His systems analyze hundreds of thousands of transactions per second to help professionals identify and interpret market activity in real time, supporting informed trading decisions and intelligent idea generation.

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