The Money Tree

Safely Generating Income in Retirement

New NP Trade – UNG

Posted by mounddweller on June 18, 2009

Guys & Gals,

I executed a new trade today; well, OK partially executed.  I entered a trade to sell 10 JUL $13 puts at $0.35 or better.  By the end of the day I had only gotten a partial fill on 3 of my 10 contracts.  It was very frustrating to say the least.  UNG went down all day but yet I couldn’t get filled.  Never mind the fact that others were periodically getting filled at $0.35.   Yesterday, the JUL $13 contracts traded at $0.35 when UNG was as high as $15.80.  Today, I got my partial fill at $0.35 while UNG was trading around $15.45.  UNG closed right at its low of the day of $15.29 and yet still noone wanted to pay $0.35.  The bid on the option closed at $0.25.

While I was very much wanting to blame the market makers I know that’s not the real reason.  It’s all about supply and demand.  We’ll wait and see what tomorrow brings.  Hopefully I’ll get filled on my remaining 7 contracts.

Anyway, enough about that.  Here’s why I like this trade. 

(1) UNG has never closed below $13.  It’s intra-day trading low is $12.69.  Thus, low probability of being assigned at this price.
(2) UNG is currently attracting a lot of attention. Look at the increase in volume in just the past few months. I think this means the ‘smart money’ knows the bottom is in for natural gas and thus are ‘placing their bets’.
(3) UNG closed today at $15.29.  That gives me 15% of downside protection.
(4) My ROIC is 0.35 / 13 = 2.69%.  That’s 32.76% annualized.

Note: When studying the below price chart you’ll notice this NP trade does not have a TA (i.e., ‘take action’) rating.  Rather, the stock is still trading well below the bottom leg of the VISION V and thus only rates a GR (i.e., ‘get ready’). 

So why did I go ahead with the trade? Well, primarily because as I get more comfortable trading NPs I’m finding that, depending on your objectives, many good NP trades can be found on GR rated stocks.  My objective in these type of trades is to NOT have the stock put to me.  Thus, I’m looking for stocks that have bottomed and ‘turned the corner’ so to speak but haven’t gotten very far away from their 52-wk low.  Other criteria I look for are a minimum of 15% downside protection, and a strike price near, preferably less than the 52-wk low.  I also look for trades that give me a decent ROIC even though I’m selling a put with a strike price > 15% below the current price.  My target is 2.5 – 3.0% for the near month expiration.

VISIONS - UNG Price Chart

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2 Responses to “New NP Trade – UNG”

  1. Jeff said

    I like your position and the logic you used regarding the protection and the potential returns.
    Nice job!
    Jeff

  2. mounddweller said

    Thanks Jeff. I really like these kinds of NP trades. I’ve executed several like this since the beginning of the year and haven’t had the stock put to me yet. Knock on wood!

    Regards,
    Troy

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