I reestablished a position in natural gas yesterday by buying shares in Chesapeake Energy (CHK) as well as buying October 25 puts. My plan is to wait until next month and sell covered calls if the stock is up or buy additional shares if the price is down. You may be wondering about the rationale of such a strategy, but think about it this way.
If the price of the shares is down to $22 or $21 per share, I have an automatic profit on those shares since I have purchased the puts for October and can sell those shares for $25. Granted the puts cost some money, but I will sell some covered calls to ultimately pay some (if not all) the cost of those puts.
If the stock is up from my purchase price, then that is also good. I can sell covered calls at a higher strike, get some immediate cash and then additional profit in the form of capital gains. I think it will turn out to be a good trade.
There are several factors that might impact the price of natural gas over the next several months which will have some bearing on the price of CHK. Natural gas supplies are about 15% higher than normal for this time of year which would tend to push prices lower. Hurricane season in the Gulf of Mexico could push prices higher if a lot of damage is done. A warm summer could push prices higher since electricity generation needed for air conditioning is often provided by natural gas generating plants.
Truthfully, however, I have no idea what will be happening to prices this summer. That is why I have hedged my position with puts and will also be averaging into a larger position over the next few months. Over time, I believe that inflation and demand will eventually bring down the over supply but that could be a year or several away.
Nonetheless, I still like having exposure to real assets. My house is warmed by natural gas as is my water year round. If my bills start to rise, I want to be able to make money in the process.
Until next time--Keep it REAL!