Options Bulls Rediscover Old Favorite in Energy Space


This post is for education purposes only and should not be interpreted as a trade recommendation. Options trading may not be suitable for all investors.

Cheniere Energy (LNG) was a darling in the natural-gas frenzy that swept markets early this decade. Its planned fleet of massive tankers would carry America’s abundant shale gas to Asia and Europe. Old smoke-belching coal plants would shut down and “carbon footprints” around the globe would shrink — all thanks to a new kind of technology based on super-cooled compressed natural gas.

Even if you never heard of it, LNG saw huge options activity in those days. TradeStation data shows it often trading more than 100,000 contracts per session in 2013 and 2014. Derivatives flow dried up over the next three years as energy crashed, but now they’re roaring back.

Almost 59,000 contracts changed hands in LNG yesterday, its busiest session in over two years. A single large bullish roll accounted for almost all the volume as an investor pushed a large upside bet through the end of the summer. Here’s a breakdown:

  • In the June expiration, some 13,000 June 60 calls were sold for $4.35 and an equal number of June 70s were bought for $0.36. Volume was below open interest in both, which suggests an existing bullish call spread was closed.
  • In the September expiration, at exactly the same time: 13,000 September 67.50 calls were bought for $2.92 and 13,000 September 75 calls were sold for $0.93. That was a new bullish call spread.
  • They received $3.99 from unwinding the June spread and paid $1.99 opening the September position. In other words, they pocketed a net $2.

But that’s not all because they now stand to collect an additional $7.50 if the stock closes at $75 or higher on September 21.

It works because owning calls fixes the price where a security can be purchased. Selling them generates income and forces an investor to deliver shares if the strike price is reached. Combining the two strategies into a single transaction is a vertical spread that can leverage a move to a specific level. See our Knowledge Center for more.

LNG inched down 0.32 percent to $62.40 but recently rode a strong earnings report to a new 52-week high. The stock hasn’t seen the spread’s $75 target level since June 2015.

Overall options volume in the name was about 6 times the average over the last month, with calls outnumbering puts by a bullish 74-to-1 ratio.

Cheniere Energy (LNG) with 50-day moving average and daily options volumes.
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.