Sell natural gas into resistance
Once demand tapers off from warmer weather, we can expect the price of UNG to do the same.
The average retail investor may follow the SPDR Gold Shares (GLD) exchange-traded fund more than oil or natural gas, but oil is probably more pertinent.
Investors who own a car require very little convincing of how the price of oil impacts their daily finances. You can follow the price of oil through the United States Oil (USO) exchange-traded fund (ETF). Even if you don't own a car, it's easy to see how oil prices matter to you. Everything you buy is either made from oil and/or delivered to the store you purchase from.
Both GLD and USO have recently made new lows for 2013. What may surprise you after viewing an oil or gold chart is that natural gas is not only making new highs for 2013, but new 52-week highs, as measured with the United States Natural Gas (UNG) ETF.
If you live in Wisconsin, like me, it doesn't take long to figure out why natural gas prices have climbed so high. Normally during this time of April, the winter's snowfall has long melted. This year, we have had winter snowstorm warnings as recently as April 21.
I haven't seen a day yet in 2013 with a daily temperature over 50 degrees. More of my lawn is covered with snow than grass.
If you love summer more than winter, it's downright depressing, but not for the price of natural gas and UNG. The daily chart for UNG says it all. As long as winter will not leave, natural gas prices will not fall; however, time is not on the side of the natural gas bull.
We all know summer will come, but in the meantime, the amount of working natural gas underground storage (short-term storage, see U.S. Energy Information Administration) continues to decline and is significantly below the year-ago and five-year averages.
Overall, natural gas storage reserves are 32% below last year's levels. This becomes even more compelling when you consider that the overall supply and production this year are above 2012 levels. If you understand supply and demand curves, you realize that prices can remain higher than normal as long as either supply is reduced or demand is higher than normal.
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.
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