Betting Against Natural Gas Prices; How To Play The Trade With ETFs (UNG, FCG, KOLD, DGAZ)

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March 15, 2012 10:22am NYSE:DGAZ NYSE:FCG

Jared Cummans:  Of all of the commodities that have experienced a fair amount of volatility as of late, none have fared worse than natural gas. This asset has been one of the more frustrating commodities over the past few years, as it has continually hit new lows while many called it undervalued, only to

watch it lob off even more of its price. Already in 2012, NG futures have sank over 27%, and a quick glance at its historical performance reveals a nasty downward trend that has persisting starting with the 2008 recession. These massive losses have burned a number of investors who have sworn off this commodity after buying in at what seemed like lows, only to watch natural gas sink below $5, $4, and finally $3. In fact, NG currently has its sights set on losing grip of the $2 mark. [Related: United States Natural Gas Fund (NYSEArca:UNG),  ISE-Reverse Natural Gas Index Fund (NYSEArca:FCG)]

For those who feel that NG will only continue its massive losses, there is still a way to make a profit from the flailing commodity. Shorting natural gas is a relatively dangerous strategy and is one that many are uncomfortable with given that danger that already comes along with futures contracts. Others like to play options on these futures, but this can also be incredibly risky; both options and futures can be extremely complex on their own, so combining the two can be a recipe for disaster. Enter exchange traded products, as there are a few options that present interesting ways to profit from the losses of this ultra-popular asset [see also 12 High-Yielding Commodities For 2012].

ETFs To Short NG

The most popular ETF related to natural gas is UNG, a fund that has been forced to reverse split twice in the last two years just so it can stay open for investors. Most investors have been warned about the front-month roll that destines UNG to fail in a contangoed environment, leaving this product as a trading instrument, rather than a buy and hold fund. But with NG markets exhibiting contango through 2020, now may be a good time to establish a short position in this ETF. Note that the contango curve can be swiftly turned on its head which would destroy a short positions, but for those who keep an active watch on futures markets, betting against this ultra popular fund can be a lucrative strategy [see also Understanding Contango Through Natural Gas Futures].

But even shorting a fund has its own set of risks that many pass on due to its complexities. This is where the innovation of the exchange traded world comes into play, as there are now two options to short natural gas through funds designed to profit from the failure of this fossil fuel [see also Why You Should Sell UNG, Buy FCG]:

  • UltraShort DJ-UBS Natural Gas (NYSEArca:KOLD): Launching late last year, this fund offers a -2X leverage on front month NG futures. As such, watching this ETF move by 5% or more on a  daily basis is not uncommon. While buying and holding a leveraged fund can be dangerous, those willing to put in the effort to carefully monitor this fund can reap a significant reward, as KOLD is up over 66% this year alone.
  • 3x Inverse Natural Gas ETN (NYSEArca:DGAZ): This fund was introduced this year and provides one of the most enticing strategies on the market. DGAZ offers a -3X inverse play on natural gas front month futures. Using a front month roll means that NG can remain flat and this fund will be able to prey on contangoed markets. The fund’s high leverage makes for extreme risk, but the potential for some massive returns. Traders who can stomach NG’s volatility should give this fund a closer inspection to see if it aligns with you strategy [see also Five Commodity MLPs With Sky High Yields].

Written By Jared Cummans From CommodityHQ  Disclosure: No positions at time of writing.

CommodityHQ offers educational content, analysis, and commentary on  global commodity markets. Whether you’re looking to speculate on a  short-term jump in crude or establish a long-term allocation to natural  resources, CommodityHQ has the information you need.


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