Friday, September 4, 2009

Natural Gas Exchange Traded Funds Puts at 7 Year Low

By Jeff Kearns and Asjylyn Loder

Sept. 3 (Bloomberg) -- Trading of bearish options on the U.S. Natural Gas Fund rose to a record as the fuel fell to a seven-year low and investors bet that the exchange-traded fund tracking gas futures will keep tumbling.

Volume for puts giving the right to sell the ETF rose to 220,165 contracts, or 2.6 times the four-week average, as options traders bought the contracts to protect from a further drop if the fund extends its 61 percent slide this year. Puts traded 1.4 times more than calls, which give the right to buy the shares.

The fund, known by its UNG ticker, lost 4.7 percent to $9.01, the lowest level in its two-year history. The most-active contracts were October $7 puts, which rose 52 percent to 35 cents and accounted for almost an eighth of put volume. Ninety- four percent of those puts traded on the ask price, which indicates that buyers initiated the transactions.

“The fact that the most activity is around such an out-of- the-money put means people are expecting an extreme down move in the UNG,” said Rebecca Cheong, an equity derivatives strategist at Societe Generale SA in New York. “There’s a lot of concern.”

Natural gas futures fell in New York to the lowest level since March 2002 after a government report showed stockpiles expanded more than average to a record for this time of year.

Supplies rose 65 billion cubic feet in the week ended Aug. 28 to 3.323 trillion cubic feet, the Energy Department said. Inventories are the highest for that week since the department began publishing data in 1993. Stockpiles typically gained 64 billion cubic feet for the period in the past five years.


The UNG has been trading at a premium to its underlying natural gas assets since Aug. 12, when it announced that it couldn’t issue new shares because of limits on how many natural gas contracts it can buy. Today, shares cost as much as 18 percent more than the value of the fund’s gas contracts.

Shares outstanding in the $3.1 billion fund increased 11- fold since the start of the year. Every share in the fund is backed by natural gas investments, including contracts on the New York Mercantile Exchange and InterContinental Exchange Inc.

The fund needs to shrink its position on those exchanges because of limits set by the Commodity Futures Trading Commission. The commission has been tightening those limits, which are designed to keep one trader from gaining too much control of the market.

To replace its natural gas contracts, the fund has been buying off-exchange swaps, which aren’t capped. If the fund can find suitable investments that track the price of natural gas, it will resume issuing new shares.

The premium is likely to collapse when the fund begins allowing the creation of new shares.

To contact the reporters on this story: Jeff Kearns in New York at; Asjylyn Loder in New York
Last Updated: September 3, 2009 16:36 EDT

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