By Beacon Energy's Stephen Kessler

Enjoy this week's insights into the North American natural gas market sent to you compliments of ICE. With over 25 years’ experience in derivatives, Beacon Energy's Stephen Kessler shares analysis on market movements as well as his own trade insights.

Stephen Kessler
Natural Gas Broker, Beacon Energy Group

Kessler has been brokering at Beacon Energy Group since 2010, putting out commentary on natural gas market movements as well as his own trade insights. Kessler has more than 25 years’ experience within the derivatives markets, and prior to his role at Beacon, he was trading natural gas and soft commodity options both independently as a market maker and with a hedge fund.

If you’re interested in a more in depth look or wish to provide feedback, connect with Stephen Kessler.

Connect on LinkedIn

DECEMBER 13, 2017 

  • This past week saw a .30 drop in spot futures as we saw hints of capitulation and stop outs. Yesterday the market broke $2.70, a price virtually no one saw coming this early in the winter. Almost equally as severe was the .20 drop in the JV8 futures strip, something I’ve been waiting for since it sat between $2.90 and $3.00 for weeks. I am no fundamental expert but it feels like this is a case of too many bulls in a market that saw fairly normal weather but some scary production numbers and signs that producer hedging was continuing even as the futures began to slip. If the market falls further the number of natural buyers is scary low.
  • We may see sideways action in F for a bit but I think the G $2.70 straddle closing at .30 feels cheap to me and a good risk/reward long. There is still plenty of time for this market to see outlier weather in the next month and given it took a week to move .30, having 6 weeks for G feels pretty good. Winter has lost its blowout potential but it still has the time to have many more double digit moves.
  • I talked last week about F being the most attractive month to own for the gamma and obviously that paid off this week. I also mentioned my expectations for call skew pressure and a shrinking of the negative put skew. F no longer has a negative put skew, G has very little as well and call skew took it on the chin.
  • I have been talking about the downside risk to JV8 for a long time, at these prices I feel like the strip is closer to fair, though if we do not get sustained cold to start 2018 lower levels - even significantly lower - would not surprise me. JV8/JV9 has shrunk from a $.20 premium to flat so at those levels I would wait to sell summer rallies rather than initiate shorts at these prices.
  • Given how heavy Cal18 feels any bounce from these levels may see a quick widening of the H/J futures spread. With that I still like H/J $2.25 put spread (owning J) if it gets back near flat premium. In saying that I do not think the H is overpriced, I just think at these levels in the futures spread the J is a better value in my opinion. In fact if we get a bounce and some more negative put skew returns I would use that as an opportunity to put on something like H 2.75/2.25 1 by 2 p/s hedged - short 1, long 2.
  • We are also at a futures price where I feel like any lower from here and vol in Q1 will firm, not soften, so the disappearance of the negative put skew makes sense to me and I would argue that the G 250 put should trade at a closer vol to the G 300 call than it currently does. Same holds true for something even as tight as H 250/275 fence - I would rather own the put at a vol discount to the call. That does not mean that a sharp move higher will not bring back call buyers and firm vol, but a moderate bounce should have far less impact. In general I think long gamma will continue to pay, but given its post-holiday expiration F is trickier so I would play it in G.
  • I also think these prices are cheap enough where owning some low premium calls in G and H are a worthwhile spec, calls worth .015-.02. There is still plenty of time for a pop, particularly given the heavy long liquidation. I would be more aggressive in owning these calls if I did the tight fences in G and/or H long put, short call.

Stephen Kessler
Natural Gas Broker, Beacon Energy Group

Kessler has been brokering at Beacon Energy Group since 2010, putting out commentary on natural gas market movements as well as his own trade insights. Kessler has more than 25 years’ experience within the derivatives markets, and prior to his role at Beacon, he was trading natural gas and soft commodity options both independently as a market maker and with a hedge fund.

If you’re interested in a more in depth look or wish to provide feedback, connect with Stephen Kessler.

Connect on LinkedIn

DECEMBER 13, 2017 

  • This past week saw a .30 drop in spot futures as we saw hints of capitulation and stop outs. Yesterday the market broke $2.70, a price virtually no one saw coming this early in the winter. Almost equally as severe was the .20 drop in the JV8 futures strip, something I’ve been waiting for since it sat between $2.90 and $3.00 for weeks. I am no fundamental expert but it feels like this is a case of too many bulls in a market that saw fairly normal weather but some scary production numbers and signs that producer hedging was continuing even as the futures began to slip. If the market falls further the number of natural buyers is scary low.
  • We may see sideways action in F for a bit but I think the G $2.70 straddle closing at .30 feels cheap to me and a good risk/reward long. There is still plenty of time for this market to see outlier weather in the next month and given it took a week to move .30, having 6 weeks for G feels pretty good. Winter has lost its blowout potential but it still has the time to have many more double digit moves.
  • I talked last week about F being the most attractive month to own for the gamma and obviously that paid off this week. I also mentioned my expectations for call skew pressure and a shrinking of the negative put skew. F no longer has a negative put skew, G has very little as well and call skew took it on the chin.
  • I have been talking about the downside risk to JV8 for a long time, at these prices I feel like the strip is closer to fair, though if we do not get sustained cold to start 2018 lower levels - even significantly lower - would not surprise me. JV8/JV9 has shrunk from a $.20 premium to flat so at those levels I would wait to sell summer rallies rather than initiate shorts at these prices.
  • Given how heavy Cal18 feels any bounce from these levels may see a quick widening of the H/J futures spread. With that I still like H/J $2.25 put spread (owning J) if it gets back near flat premium. In saying that I do not think the H is overpriced, I just think at these levels in the futures spread the J is a better value in my opinion. In fact if we get a bounce and some more negative put skew returns I would use that as an opportunity to put on something like H 2.75/2.25 1 by 2 p/s hedged - short 1, long 2.
  • We are also at a futures price where I feel like any lower from here and vol in Q1 will firm, not soften, so the disappearance of the negative put skew makes sense to me and I would argue that the G 250 put should trade at a closer vol to the G 300 call than it currently does. Same holds true for something even as tight as H 250/275 fence - I would rather own the put at a vol discount to the call. That does not mean that a sharp move higher will not bring back call buyers and firm vol, but a moderate bounce should have far less impact. In general I think long gamma will continue to pay, but given its post-holiday expiration F is trickier so I would play it in G.
  • I also think these prices are cheap enough where owning some low premium calls in G and H are a worthwhile spec, calls worth .015-.02. There is still plenty of time for a pop, particularly given the heavy long liquidation. I would be more aggressive in owning these calls if I did the tight fences in G and/or H long put, short call.

Stephen Kessler
Natural Gas Broker, Beacon Energy Group

Kessler has been brokering at Beacon Energy Group since 2010, putting out commentary on natural gas market movements as well as his own trade insights. Kessler has more than 25 years’ experience within the derivatives markets, and prior to his role at Beacon, he was trading natural gas and soft commodity options both independently as a market maker and with a hedge fund.

If you’re interested in a more in depth look or wish to provide feedback, connect with Stephen Kessler.

Connect on LinkedIn

DECEMBER 13, 2017 

  • This past week saw a .30 drop in spot futures as we saw hints of capitulation and stop outs. Yesterday the market broke $2.70, a price virtually no one saw coming this early in the winter. Almost equally as severe was the .20 drop in the JV8 futures strip, something I’ve been waiting for since it sat between $2.90 and $3.00 for weeks. I am no fundamental expert but it feels like this is a case of too many bulls in a market that saw fairly normal weather but some scary production numbers and signs that producer hedging was continuing even as the futures began to slip. If the market falls further the number of natural buyers is scary low.
  • We may see sideways action in F for a bit but I think the G $2.70 straddle closing at .30 feels cheap to me and a good risk/reward long. There is still plenty of time for this market to see outlier weather in the next month and given it took a week to move .30, having 6 weeks for G feels pretty good. Winter has lost its blowout potential but it still has the time to have many more double digit moves.
  • I talked last week about F being the most attractive month to own for the gamma and obviously that paid off this week. I also mentioned my expectations for call skew pressure and a shrinking of the negative put skew. F no longer has a negative put skew, G has very little as well and call skew took it on the chin.
  • I have been talking about the downside risk to JV8 for a long time, at these prices I feel like the strip is closer to fair, though if we do not get sustained cold to start 2018 lower levels - even significantly lower - would not surprise me. JV8/JV9 has shrunk from a $.20 premium to flat so at those levels I would wait to sell summer rallies rather than initiate shorts at these prices.
  • Given how heavy Cal18 feels any bounce from these levels may see a quick widening of the H/J futures spread. With that I still like H/J $2.25 put spread (owning J) if it gets back near flat premium. In saying that I do not think the H is overpriced, I just think at these levels in the futures spread the J is a better value in my opinion. In fact if we get a bounce and some more negative put skew returns I would use that as an opportunity to put on something like H 2.75/2.25 1 by 2 p/s hedged - short 1, long 2.
  • We are also at a futures price where I feel like any lower from here and vol in Q1 will firm, not soften, so the disappearance of the negative put skew makes sense to me and I would argue that the G 250 put should trade at a closer vol to the G 300 call than it currently does. Same holds true for something even as tight as H 250/275 fence - I would rather own the put at a vol discount to the call. That does not mean that a sharp move higher will not bring back call buyers and firm vol, but a moderate bounce should have far less impact. In general I think long gamma will continue to pay, but given its post-holiday expiration F is trickier so I would play it in G.
  • I also think these prices are cheap enough where owning some low premium calls in G and H are a worthwhile spec, calls worth .015-.02. There is still plenty of time for a pop, particularly given the heavy long liquidation. I would be more aggressive in owning these calls if I did the tight fences in G and/or H long put, short call.

December 13, 2017 

This past week saw a .30 drop in spot futures as we saw hints of capitulation and stop outs. Yesterday the market broke $2.70, a price virtually no one saw coming this early in the winter. Almost equally as severe was the .20 drop in the JV8 futures strip, something I’ve been waiting for since it sat between $2.90 and $3.00 for weeks. I am no fundamental expert but it feels like this is a case of too many bulls in a market that saw fairly normal weather but some scary production numbers and signs that producer hedging was continuing even as the futures began to slip. If the market falls further the number of natural buyers is scary low...

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