Riding The Natural Gas Rollercoaster

The LNG carrier Arctic Princess.
The LNG Carrier Arctic Princess (Eric Bakker/Port of Rotterdam).

(Originally published on July 16th, 2022)

Natural Gas Climbs Back

After crashing by about 25% at the end of last month, natural gas has regained momentum this month.

In my personal account, I bought at-the-money puts on the ProShares UltraShort Bloomberg Natural Gas ETF (KOLD) when it hit $40, and then sold them (too soon) for a 25% gain about a week later (had I held them until Friday, I would have been up about 100% instead). But here’s another way to play the natural gas rollercoaster. 

A Leveraged Bet On U.S. Natural Gas

The ProShares Ultra Bloomberg Natural Gas ETF (BOIL), a 2x leveraged bet on American natural gas, has been recent top name in our system, including on Friday, when it appeared along with the un-leveraged United States Natural Gas Fund, LP (UNG), and Warren Buffett’s new favorite energy name, Occidental Petroleum Corporation (OXY). 

Screen capture via Portfolio Armor on 7/15/2022.

A Hedged Bet On Natural Gas Prices Going Even Higher

Leveraged ETFs can be extremely volatile, but here’s a way to use that volatility to your advantage. This was the optimal collar, as of Friday’s close, to hedge 1,000 shares of BOIL against a greater-than-30% drop by mid-December, while not capping your possible upside at less than 100% over the same time frame. 

Put leg of BOIL collar.
Call Leg of BOIL Collar.


Screen captures via the Portfolio Armor iPhone app

Note that the net cost of this collar was negative, meaning you would have collected a net credit of $5,400, or nearly 8.31% of position value when opening it. So your maximum upside here would be a gain of more than 108% by December (100% + the 8.31% upside cap), and your maximum drawdown would be a decline of 30%.

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