Why I Like UNG

Over the past two years, UNG would have been a terrible investment. Even as the stock market has retraced some of its losses, UNG stands at 15% of its peak.

 

However, even with the uptick of implied vol in the equity markets, the VIX is still at around 25. This doesn't compare with the hefty 45% implied vol in the UNG options. Here is the trade:

 

Sell February UNG 10 Puts at $0.33. With UNG at $10.32, it will have to fall 6% before you start losing money. If, on expiration, UNG has fallen, the implied vol will still let you either roll down those puts at a credit or let you sell calls against the stock. Here are some scenarios for the March options at February option expiration at 45% implied vol:

Even with a big selloff, you can still sell 10 calls against it and take in a premium of >1% a month. This also discounts the fact that negative moves are generally negatively correlated with implied volatility, so the premium would likely be more.

 

If it were to move down, I would roll down as much as I could while still being at a credit. For example, if UNG was at $9.50 and the puts were worth $0.50, I would buy back 2 of the Feb 10's and sell 1 of the March 10's and 1 of the March 9's at a credit of -2*$0.50 + $0.77 + $0.25 = $0.04.