Mitigating UNG

What do you do when a trade goes--- not wrong, but profoundly ambiguous?

Ambiguity is the enemy of profit, except when it's not. And this may be one of those occasions when we can turn ambiguity into cash.

UNG, which I opened Tuesday as long (bullish) shares at 9.31, promptly turned around this morning and is trading at the 8.96 level, a 3.9% decline.

The mfi has tweaked down (as of an hour and 45 minutes prior to close), but the pps isn't showing a bear signal. In the fundamentals, we know that we're entering winter, we know that winter increases demand for natural gas, we know that industrial production is s-l-o-w-l-y improving and that increases demand for natural gas.

Yet the price is below the 20-day simple moving average, and that MA is moving down.

So, everything points us to a "beats me" position on this stock. How to deal with it?

One thing that can be done is to buy more shares at the lower price, thereby lowering our basis. I've done that, at 8.94, making the new basis 9.13. That reduces the loss at the current price to 1.9%.

Another possible mitigation is to sell a call option against the shares I own. The December $9 strike call is selling for about a 0.50 premium per share. So, I sell the call, and that makes my new basis essentially 8.63, and I'm profitable again.

What can go wrong? The covered calls will expire worthless if shares remain below $9, and I get to keep my 50 cents, but if shares continue to fall, however, below 8.63, I'll still lose money.

If shares rise above 9.00, which I expected based on yesterday's signal, then near expiration I'll have to sell someone my shares at 9.00, and I shall have lost potential profit.

I can always close the option position at any time, but I'll have to give back some of my premium for the privilege.

One thing for sure: If I simply close the position, I've taken a loss. If I sell the covered call, then I'm still in line for the possibility of profit.

An interesting dilemma. I'll decide in the last half hour of the trading day.