Natural Gas Pair Trades

Here's just a quick post before I take off for a two week long vacation. As you know, I think natural gas is forming an important bottom here. While it could go lower, I could also see it going much higher in the short term. In the long run, it seems impossible for natural gas to not rise.

That being said, I am nervous. I am nervous that the stock market will crash any day and if it does it will take commodities down with it. I'm also nervous that there are way to many traders jumping on the natural gas bandwagon before a clear sign of higher highs, they could get wiped out on a renewed and accelerated decline. I am nervous about the open interest in UNG calls and the building natural gas stockpiles. I don't want to be short, but I'd like a hedge. The two that make sense to me are natural gas producer stocks and solar stocks. Both of those sectors have shot up huge in advance of natural gas prices of which their industry completely depends. So shorting either FCG (nat gas producer etf) or TAN (solar stock etf) to hedge a long position in UNG seems prudent.

Here are the charts for shorting FCG or TAN whist long UNG. In both cases there is a long way back to the "mean value." With both you could "own these charts" by being short one share of FCG or TAN for every share of UNG long. In both cases I could see these trades doubling by Fall in a "mean reversion."

See you in a few weeks!

Disclosure: I own UNG calls.