Trade Summary: February 24, 2014

February 24, 2014

 

 Trade Rationale

The impact of the harshest winter in a generation in the US is far reaching.  We already have seen how the awful weather conditions have skewed economic data.  For instance, retail sales and home construction took a major hit over the past several weeks as people have been reluctant or unable to go about their ordinary lives.

On the other hand, the arctic weather has been a boon for natural gas.  The price of natural gas has risen nearly 50% over the last three months.  And, the commodity has broken above $5.00 per unit for the first time since 2010.

Over the long-run, I’m extremely bullish on natural gas.  As a cheaper, cleaner, domestically abundant alternative to oil, it’s hard to ignore the fuel’s future prospects.

Nevertheless, for now, natural gas is too expensive.  The jump in nat gas prices are almost entirely due to the cold weather.  Of course, this weather – as bad as it is – is a short-term situation.  Spring will get here soon enough.  And, nat gas prices will return to a more reasonable price or range.

We’re going to take a bearish position on natural gas itself, as well as a major natural gas producer.  We’re also going to go long on a nuclear energy stock, as I believe nuclear power is set to rebound once investors stop focusing on the poor weather.

We’ll start with buying puts on United States Natural Gas Fund (UNG).  UNG is the most popular way to trade natural gas.  The ETF is designed to track the price of natural gas futures and is the easiest way for investors to take positions on the commodity.

In addition, we’re going to buy puts on Cheniere Energy (LNG).  LNG is focused on the liquefied natural gas business.  I like LNG in the long-run, but liquefied natural gas gets a boost whenever the price of natural gas rises.  As such, LNG is due for a pullback once nat gas prices normalize somewhat.

Finally, as the weather improves, the focus will shift from oil and gas to other forms of power.  I believe nuclear energy has been overlooked recently as is due for a rebound.  As such, we’re going to buy calls on Cameco (CCJ).  CCJ is the largest uranium producer in the world.  Demand for uranium increases as the market for nuclear power improves.  As s result, CCJ is well-positioned to thrive off renewed interest in nuclear power.

Now, let’s take a look at the trade specifics.

 

Trade Details

#1) Buy United States Natural Gas Fund (UNG) July $25 Puts up to $2.30

Keep in mind, we want UNG to head lower.  Our first profit point for conservative traders is at $23.  For aggressive traders, you can hold all the way down to $20.  Regarding risk control, the conservative exit level is $28.  $30 is the final resistance level for aggressive traders.

#2) Buy Cheniere Energy (LNG) June $45 Puts up to $2.75

Like UNG, we want LNG to trade lower.  Our first exit point for conservative traders is at $44.  For aggressive traders, you can hold all the way down to $40.  For risk control, the conservative exit level is $53.  $56 is the final resistance level for aggressive traders.

#3) Buy Cameco (CCJ) June $21 Calls up to $1.85

In this case, we want CCJ to trade higher.  Our first profit-taking exit point for conservative traders is at $23.  For aggressive traders, you can hold to $25.  For risk control, the conservative exit level is $19.50.  $18 is the final support/exit level for more aggressive traders.

 

Category: AOA Trade Summary