- UNG is a liquid ETF with plenty of skew on the call side.
- Implied volatility is currently well above average in the December & January cycles.
- The sale of call ratios perform well in this environment.
Recently we sold option premium in United States Natural Gas Fund, LP (UNG) where we sold the regular January $18/$15 put spread along with the $32/$35 ratio spread. We sold the position for $2.06 per combo on Monday of this week (28th) and as we can see below, the combo is now worth $1.59. The present price of UNG comes in at $21.72 per share.
So why did we sell a ratio spread on the call side instead of a more traditional call spread for example which would have turned the combo into an iron condor? The answer is skew which UNG continues to have in spades at present on the call side. What this means is that the fund’s calls trade much richer than its associated puts. Furthermore, by selling a ratio, we can take advantage of this skew by selling multiple calls ($35 strike) against calls that are less out of the money ($32 strike). This enables us to widen our breakeven up to a higher price which comes in at $40.06 on the upside.
Call ratios work well because of the embedded long call spread in the setup. Call spreads trade cheaply in call skew setups which means those long-call spreads can be bought for pennies on the dollar. We intend to take this off if we can buy back the combo for $1 each.