He is spot on. UNG invests in futures and has to roll them over. Basically, they are giving up the contango every time they roll.
If you are bullish NG, just buy the futures or an E&P that is gassy, like SWN or RRC.
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Dennis Gartman on Natural Gas-Advice Needed!
- Thread starter brothertruffle
- Start date
He is spot on. UNG invests in futures and has to roll them over. Basically, they are giving up the contango every time they roll.
If you are bullish NG, just buy the futures or an E&P that is gassy, like SWN or RRC.
Quote from AAAintheBeltway:
He is spot on.
I don't agree. A future price reflects the expected... future... price. If you can't make money betting that price is too high or too low, that's your failing as a trader, not an evil scheme by market manipulators (or however the zerohedge crowd would put it). Contango and backwardation are a fact of life -- get over it -- they're part and parcel of futures trading.
Quote from Rodney King:
Typo? Probably you meant to say "<i>current</i> price plus cost of carry." ... Obviously the future price is indeed the price for future delivery.
indeed. got confused with the original post - thought you had dropped CoC but now I see of course you did not. cheers
the reason ung sucks in a contango is because the buy front month futes and roll them to the next month every month. they have to make up the difference every single month they do that just to break even.
for example: right as i am writing this july is 5 cents cheaper than august. if i roll out of my july futes into august, i am paying a 5 cent premium. i have to make that 5 sents just to break even. then i get to do it all over again next month when i sell auust for 3 cents cheaper than i buy sept.
its not that ng is a bad investment, but the method ung uses stinks - as most energy etfs - in a contango market.
theyre great in a backwardized market for the same reason.
for example: right as i am writing this july is 5 cents cheaper than august. if i roll out of my july futes into august, i am paying a 5 cent premium. i have to make that 5 sents just to break even. then i get to do it all over again next month when i sell auust for 3 cents cheaper than i buy sept.
its not that ng is a bad investment, but the method ung uses stinks - as most energy etfs - in a contango market.
theyre great in a backwardized market for the same reason.
Quote from bt116:
its not that ng is a bad investment, but the method ung uses stinks - as most energy etfs - in a contango market. theyre great in a backwardized market for the same reason.
Given the low recent prices of NG, it's unsurprising the market is in contango. In a sense "losing" the monthly roll is like paying an options premium. From this low level, NG could spike higher at any time, and if/when that happens, the near-in contract will go up much more than the far-out, and the market will become backwardated. No one wants to be short at low prices, thus exposed to violent upspikes. NG can go down only 100% from current low levels, but it could go up 200%, 300%, whatever.
Quote from Rodney King:
Given the low recent prices of NG, it's unsurprising the market is in contango. In a sense "losing" the monthly roll is like paying an options premium. From this low level, NG could spike higher at any time, and if/when that happens, the near-in contract will go up much more than the far-out, and the market will become backwardated. No one wants to be short at low prices, thus exposed to violent upspikes. NG can go down only 100% from current low levels, but it could go up 200%, 300%, whatever.
There are too many mistakes in this to correct, but I suggest that backwardation is not automatic in a rising market. It reflects a shortage of spot supplies, which is unlikely in NG, since storage is right at 5 year highs.
Quote from AAAintheBeltway:
There are too many mistakes in this to correct, but I suggest that backwardation is not automatic in a rising market. It reflects a shortage of spot supplies, which is unlikely in NG, since storage is right at 5 year highs.
barring a really cold winter, probably a better chance of seeing some of those backwardated spreads in 2011 slipping into contango no?
Quote from AAAintheBeltway:
There are too many mistakes in this to correct, but I suggest that backwardation is not automatic in a rising market. It reflects a shortage of spot supplies, which is unlikely in NG, since storage is right at 5 year highs.
No, of course it's not "automatic" (that's your supposed insight?) but it's typical of energy markets. The near-in months are more volatile, so when there's a sharp price rise, they tend to go up more than far-out, thus backwardation.
If this weren't the case, everyone and his brother would make free money by riding the forward curve.
Re "storage is at...", yes, but that comes and goes.
Re "too many mistakes" -- enlighten me, I'm eager to learn.