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.

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AUGUST 15, 2017 

  • After our week spent around $2.80 the market briefly managed to lift its head. A grind higher before Thursday’s stats, then what looked on paper to be a very productive number took us back to $3 before another disappointing Monday saw us fail there and drift a bit lower. I think the market is holding up well and showing good bottoming action given tepid weather. As EOS predictions have not really seen appreciable increases, we could still be setting up for a late summer/early fall pop in anticipation of winter. I am certainly not advocating jumping onto a hard-to-defend bull story yet, but the more complacent and comfortable the market gets that moves up are inevitable failures, the better the chance we see one that eventually breaks through in the coming weeks. For now there is little reason to fight the trend in the fronts - .05-.06 gamma break-evens are the norm and they look fair to me.
  • Until/unless I was full on bullish I am backing away slightly from the case I have been making that the negatively skewed puts are good value against calls (hedged). There is no reason we still cannot test lower levels again before the calendar turns to fall and the puts just have not performed on dips. Given how late we are in the season I do not think we will have a near term washout. Dips have included some gaps lower but the bulk of them have just been orderly selling in fairly tight ranges. The puts will have their day - likely hedged on an up move, but it just may be too early.
  • Q1 2018 has backed off slightly from its enormous vol premium to Q4. I do not expect it to have any collapse in the near term given winter is still months away, but the Z/F vol spread I had been discussing as looking too wide has shrunk by 2 or more vols, putting it at levels I consider closer to fair - so that trade has come back in line. I still think F remains the most vulnerable Q1 2018 month in vol terms. In saying that we have also seen GH come in on relatively light volume when funds are not there to support it. I would treat those dips with caution since we will be entering a season where potentially a lot of bullish winter bets may be added to.
  • I also still think X remains an attractive month on a relative basis compared to the months around it, though its vol premium to V has already begun to push out slightly. There may be time for futures spread moves into the fall and the gamma of owning X vol 6% under F may be something to take advantage of as we move closer to fall - something in the at-the-money or even puts.
  • Nothing has changed on the H8/J8 225 p/s or H8/JV8 225 p/s - they both still look like very attractive specs to me at very low premiums. As J8 vol has gotten hit I have also begun looking at the H/J 2.50 p/s but I would likely wait for H/J futures spread to pull back a bit to initiate that one.
  • I also discussed the J8 out of the money calls vs. the back end of summer. Those are just beginning to move but I still see opportunity there to own the deferred months at very low premium and a nice vol discount.
  • Lastly there has been in increase in call spread buying Q1 2018, including some 1 by 2s. If skew compresses significantly on the low delta calls I would look to put on some out-of-the money 1 by 2 call spreads (long the 2) as a low premium upside protection trade - ideally in G and H.

This commentary has been prepared by Creditex Securities Corporation’s Beacon Energy brokerage group and it is for distribution to Eligible Contract Participants only and is not intended for retail customer use. Any information found herein that purports to represent factual data has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness. The contents of this commentary reflect the current views and opinions of its author and such views may change without notice depending on new information or market conditions and the author undertakes no obligation to update the commentary. This commentary and the information found herein has been prepared solely for informational purposes and should not be considered investment advice and is neither an offer to sell nor the solicitation of an offer to buy any financial product(s). Futures and options trading involves risk and is not for everyone and any reliance you place on this commentary and the information found herein is strictly at your own risk.