I would like to tell you my experiences with natural gas ETF trading.

On September 14, 2009 on two separate trades of Horizon Beta HNU I purchased 400 shares at $2.49 and 400 shares at $2.60 for a total cost of approximately $2000 Canadian. My thoughts at the time were that it was a very short-term bullish scenario for natural gas and I was right. Natural gas for September 2009 code NGV9 was trading around $3.20 when it started to trade in $3.60 when I close the trade on September 18. This is approximately a 10% move.

For your information I read the following from the Horizon Beta Pro ETF website.

“The Horizon Beta Pro Nymex NYMEX natural gas bull ETF and the Horizon Beta Pro Nymex natural gas bear ETF seek daily investment results equal to 200% the daily performance, or inverse daily performance, of the Nymex natural gas futures contract for the next delivery month.”

I chose the Horizon Beta HNU because it is a leveraged ETF at two to one bullish. Theoretically if the underlying moves 10% then this ETF should move 20%. I ended up making an 18% gain. Interesting to know if it sold at the end of the day before on September 17 would’ve made a 25 to 30% gain based on the prices near the end of the day.

Observations:
On September 18 the contract was down about 3% from the previous close yet I was down close to 12%. The leveraged definitely goes both ways but it is faster on the downside if you hold the opposite horizon contract. What made matters more complicated for me was the reverse five for one split that occurred after purchase— yes it was announced but my brokerage firm didn’t update this for a week (apparently very normal) and I had a devil of a time figuring this out in real-time. Was I lost? No—but my anxiety level over such a small crappy tester position was much too high so I got out.

Off the cuff summary, trading vehicle only for short term directional trading. If you have a market going in a stupid direction and fast then dive in and out like you are bathing in a Northern Ontario lake in April.

Meaning of the Story
If you are in northern Ontario in April camping for instance and you need to bathe. Then what you do is grab onto privates jump in and don’t worry too much about the niceties of using too much soap before you get out as you will be getting out faster then you got in! The latter refers to a high school camping trip from my youth in Northern Ontario that was in late April. I was almost sterilized due to our frigid attempts at bathing. Myself and all my fellow campers gave up eventually and sort of swished water on our arms and faces in the morning from that point on.

The bus trip home was an exercise in maintaining personal space to avoid the smell of others.

Thoughts on the Future
I think it is about time I learned to trade commodities. My reasoning for this is that while it may be slightly harder to set up an account and margin you have direct exposure to the directional trade you seek. My biggest concern regarding the above ETF was that the underlying product is a derivative variation of natural gas. I can see a scenario where I could rapidly lose money on a downward spike that was far less than the gains I had on the upward move. These things are repriced every morning before the market opens. Leverage of 2 to 1 with the derivative component is like playing with fire.

Besides I have no intention of trading on 10% margins and will likely use reduced leverage of 50% or to avoid getting taken out on market noise.

I will keep you posted about how I intend to reestablish my virginity!