Disaster Strikes the Hunter! (SLV, UNG, USO)

Disaster Strikes the Hunter! (SLV, UNG, USO)

Gotta lead off today with a number of trades that have either closed with October’s options expiry or that we have to consider closing immediately.

So without delay…

We start with a trade opened back on June 24th in a letter called Pumping Oil and Gas. There, we urged you consider a long position on natural gas and extreme caution with respect to oil.

As it turns out, our latter insight was dead on. Crude oil peaked precisely as we went to press and summarily tumbled by over 20% to its recent lows at roughly $79.

Not so for gas.

Natural Gas, as represented by the U.S. Natural Gas ETF (NYSE:UNG) backed off mightily, contrary to what we expected.

The trade we initiated at the time therefore ended up losing money.


Here are the numbers –

We expected a bounce from the stock, so we bought a CALL and sold a PUT for a total credit of $0.03 on the trade. The short PUT was the October 22 strike and Friday’s expiry saw UNG at $20.22. That means we bought UNG for $22 and today it’s going for $19.72.

Our loss today therefore stands at $225 (228-3), and as much as we still believe in a longer term upside for gas, we recommend you sell the shares, take the loss and wait for a better entry point on the trade.


We tried our luck again on the energy sector just over a month ago, arguing in our letter dated September 2nd that wild swings in crude and gas were not in the interest of the warring parties in either Eastern Europe or the Middle East –

[Why?] Because the big Middle Eastern producers, Saudi Arabia, UAE and Kuwait all have the will and ability to respond quickly in the event of a disruption with increased supply, and neither ISIS nor Russia has any intention of sending their current customers looking for new suppliers, a move that would dent both groups’ ability to make war.

It seems, however, that there was another strategy in play that we didn’t foresee, and that was a secret deal between the U.S. and Saudi Arabia that would significantly swing oil prices lower. The reason for the deal, of course, was to upend the Russians’ and Isis’s ability to make war, a development that plays to the interests of both the Saudis and the Americans, who are threatened by those same parties.

In the end, however, we couldn’t have predicted such an outcome. The letter was called Strangling the Energy Market, it made a bet on stability, selling strangles on both USO and UNG to the tune of a $1.34 credit per quartet sold.

And how did it come off?

Well, on September 16th, just two weeks later, we repurchased the short CALLs for $0.09 each, reducing our original haul to a net $1.16.

Yet, as of last Friday’s options expiry, we were again served bad news.

The short USO 34.50 PUTs ended up in-the-money, leaving us down $345 currently (as we hold the stock). So, too, did the UNG 21 PUTs, the stock of which we also hold, putting us a further $128 in the red.

All told we are 345 + 128 – 116 = $357 to the bad in what has been our worst ever trading fiasco bar none.

Getting Back our Groove


It’s not easy to suffer a loss, and unless you get right back into the saddle and begin to trade again – unless your start fresh without looking back – the damage will only multiply.

Because a clear head and a positive outlook are really the only requirements for a successful trader, while the tendency to mope and fret and second-guess the past is a sure fire recipe for more errors and even worse disasters.

Therefore –

Admit defeat. Regret the loss. And move on.

Fortunately, we also have some sunshine to offer today.

And it looks like this –


Exactly a month ago, in a letter called Silver and Gold(man), we proposed a trade based on the relative strength of two stocks from distinctly different sectors that had complete separate trajectories coming into the trade.

One was silver, the metal, represented by the iShares Silver Trust ETF (NYSE:SLV), which was coming off a desperate slide lower. And the other was global financial giant Goldman Sachs (NYSE:GS), whose stock had just punched above $188, just a half a percent from its eventual bull market high.

Since then the action has moved decidedly in our favor.

Silver has begun a slow ascent and Goldman has retreated with the rest of the market.

Graphically, it looks like this –

In just the last fortnight the gulf between the two has expanded, and the trade has begun to bear some choice fruit.

Namely, the SLV December 18 CALL is now selling for $0.25, while the GS October 31st 197.50 CALL is changing hands for just pennies, and we believe it will eventually expire worthless. With only nine trading days ‘til expiry and an 11.25% wall to climb before it’s in-the-money, we feel safe leaving things as they are on the short (GS) side.

We’ll be sure to report back to you at month’s end with the fate of the Goldman CALLs, but as of today we’re urging you to sell your long SLV positions for everything you can.

But why?


As of today it looks like things are going swimmingly, but we expect that’s just temporary.

Why? Because the market looks to be getting back into rally mode, and that’s sure to bode ill for the precious metals. The biggest differential between the stocks now looks to have occurred last Wednesday and Thursday, and we see little point in waiting while that gap erodes further.


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We recommend you consider a) closing out all your open UNG and USO positions as stipulated above, and b) shutting down your open SLV CALLs, also as described above.

With love of the hunt,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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