Wednesday, November 18, 2009

Establish United States Natural Gas Fund Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of the United States Natural Gas Fund (UNG) covered calls as follows:

Established the United States Natural Gas Fund (UNG) Covered Calls for Dec09:
11/18/09 Bought 300 UNG @ $8.96
11/18/09 Sold 3 UNG Dec09 $9.00 Calls @ $.51

UNG invests in near-month futures contracts and tracks the price of natural gas. The Covered Calls advisor believes that natural gas is a cost effective, clean, and abundant alternative fuel and will be an increasingly important resource in fulfilling future U.S. energy needs. At its current price near $4.30, this advisor further believes that Nat Gas now trades at the lower end of its likely price range for the next several months, and that now is a good time to initiate a covered calls position in this investment.

Some possible overall performance results(including commissions) for the UNG transactions would be as follows:
Stock Purchase Cost: $2,696.95
= ($8.96*300+$8.95 commission)

Net Profit:
(a) Options Income: +$141.80
= (300*$.51 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $8.96):
-$8.95 = ($8.96-$8.96)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $9.00): +$3.05
= ($9.00-$8.96)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $8.96): +$132.85
= (+$141.80 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $9.00): +$144.85
= (+$141.80 +$0.00 +$3.05)

Absolute Return if Unchanged at $8.96: +4.9%
= +$132.85/$2,696.95
Annualized Return If Unchanged (ARIU) +58.0%
= (+$132.85/$2,696.95)*(365/31 days)

Absolute Return if Exercised at $46.00: +5.4%
= +$144.85/$2,696.95
Annualized Return If Exercised (ARIE) +63.2%
= (+$144.85/$2,696.95)*(365/31 days)

The downside breakeven price for this out-of-the-money position is $8.45 ($8.96-$.51), and as such provides a downside profit protection of up to 4.9% below the purchase price.


  1. Jeff,

    Have you seen this article and the acompanying comments:

    I am quite suprised to see you select UNG. I will be following this one closely.

    Good luck.

  2. Tom,

    Thanks for the article. I'm bullish on the price on nat gas for the next couple of years and although UNG's tracking of the commodity is not good, it should be an adequate equity for my purposes.