BY BEACON ENERGY'S STEPHEN KESSLER
- The resilience last week’s market showed by climbing back above $3.00; shaking off a bearish EIA number while longs were emboldened by some bullish weather forecasts was wiped out quickly yesterday morning as we opened below recent lows. Another lesson that of all the data that can be analyzed, it seems like weather will ultimately trump them all.
- With some fresh shorts and a continued large long presence, we could see some orderly liquidation as that 2.75 put area looks like an obvious target. That strike has traded at a discounted skew; it will be interesting to see how that changes, as it is no longer such a wing/long shot price point.
- Yesterday was another example of how quickly a double digit move seems to happen on the way down, and how similar moves up appear labored in the sense that almost every tick has to be bought to take us higher. Again raising the question about the relative pricing and skew of puts relative to calls, as calls have maintained a vol premium this whole slide down for now.
- Implied vol opened surprisingly weak on the .15 gap lower yesterday - the fear of a true wash out is minimal and it looks to me like the market anticipates some orderly long liquidation at most, no real collapse in the near term. Vol in the front few months was sold throughout the day, N vol in particular never really bounced and closed at/near the lows of the day.
- With the severity of damage to implied vols in the fronts, it is clear there is not any significant fear of continued vacuums down, any liquidation looks like it is expected to be orderly with a sideways/lower move.
- While it is impossible to ignore the ugly tone in the market, it is also important to remember another change in weather can change that tone just as quickly. This time of year, as in winter, is no time to be married to a position.
- The longer summer stays neutral/bearish, it feels to me the call skew in both Q - the short term month with heavy call ownership - and XF - the tail end of summer/early winter will become very vulnerable as players may shift their interests further out the curve. UV and GH both may pick up interests from parties looking to roll their current positions. Additionally the market may see an increase in call spread buying instead of naked calls, also pressuring skew.
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.
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