(Updated October 2021)
UGAZ and DGAZ are ETNs tracking natural gas prices.
Energy exchange-traded products (ETPs) might be a good trading opportunity as much as energy ETFs.
UGAZ and DGAZ stock closely watch the US Natural Gas Fund (UNG) and UNG tracks the price movements in natural gas.
Let’s make a distinction between those two.
The main purpose of UGAZ (VelocityShares 3x Long Natural Gas) is to increase the daily performance of UNG by three times. That’s 300%. To make this clear, if UNG price grows 1%, UGAZ will display a daily increase of 3%. The best time to trade UGAZ is when you have a bullish sentiment on UNG.
The main aim of DGAZ (VelocityShares 3x Inverse Natural Gas) is to generate profits from the losses in the UNG fund. DGAZ will increase the losses by three times inversely. Meaning, if UNG price drops by 1%, DGAZ could bring you a gain of 3%. So, the best time to think about DGAZ is when you have a bearish sentiment on the UNG fund.
As you can see, both UGAZ and DGAZ have 3:1 leverage. That can notably boost your potential profit.
Trading UGAZ and DGAZ
If you want to trade them, it’s vital to watch the UNG fund. UNG fund is the basis of ETF that runs both of them. This can be a complex fund but you can go short in the long term and consider both UGAZ and DGAZ. Natural gas is a highly volatile commodity and UNG is not straight associated with natural gas in the physical sense. So, UNG isn’t a clever investment if you keep in mind it fell by more than 90% after its start. Also, it doesn’t pay dividends. Instead, UNG uses future contracts and OTC exchanges to find and copy the natural gas price. It doesn’t hold stocks. So, we can say that UNG isn’t a good investment by itself. There is where UGAZ and DGAZ come to the scene. If you don’t care for dividends and just want to keep the position for a short-time the long-term volatility of FUNG will not affect your investment.
As we said, UGAZ increases the UNG gains, while DGAZ goes up when UNG falls in price. But keep for the short-term, as long-term holding is never recommended.
UGAZ and DGAZ trading opportunities
These products can be risky. Well, you have to follow the news as ETNs give 3-time leverage in a single day. As we said, when the natural gas price rises by 1%, UGAZ will rise by 3%, and DGAZ will fall by 3%. To repeat, if you want to hold UGAZ or DGAZ the percentage performance will oppose your expectations.
A lot of circumstances may influence these products. For example, politics, global economy, supply and demand, weather, interest rates, and many others.
The way to trade USO or UNG is to trade options. That will allow you to achieve better risk-reward levels. The profit potential could be tremendous.
If you look at the historical data you will find peaks over winter, for example, but also, sometimes the price can make a sharp move down.
Why does this happen? The natural gas price depends on weather forecasts. So, you have to watch that. If you see the meteorologists are expecting a warm winter you can be sure the demand will be lower. So, pay more attention to DGAZ.
The other factor that may influence the gas price is the change in natural gas supply. So, you have to keep attention on weekly natural gas storage reports.
Both will give you the future course of the natural gas price. And, to add more pain, remember, UNG isn’t always successful while mimicking the gas prices. You have to be ready for the UNG price failure.
UGAZ is a tactical trading tool. It provides 3-time exposure to its reference index, the S&P GSCI Natural Gas Excess Return Index. This ETN is not designed like a buy and holds an investment. The return can differ hugely from its initial exposure.
It consists of complex effects and extreme concentration on quick period natural gas prospects.
DGAZ is the inverse product, it is intended to be a tactical trading tool, not a buy-and-hold investment. It is for a one-day holding period.