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.

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FEBRUARY 14, 2018 

  • Since my last commentary we’ve seen another slide in spot futures as we have settled in (for now) in a $2.55-$2.65 range. H/J has gone contango as winter is “over”. The HZ18 futures strip is now trading at levels under Cal19. H vol has traded in the low 30s for a week, with break-evens near $.055.
  • At these levels I think H at-the-money vol is relatively inexpensive; I think a .12 straddle is a decent risk/reward long with 2 EIA numbers remaining until expiration. My own view is that we can still test $2.40 in H, though weather and EIA misses are obvious risks. Skew is fairly balanced in H as wing puts are positively skewed.
  • That leads to the obvious question about JV vol given that straddle strip is roughly 0.33 and the summer vol curve has a fairly flat shape. That is a trickier proposition because (as many traders have suffered through these past couple of weeks) the heaviest options flow has almost exclusively sold vol through 1 by 2s, 3-ways, etc. in the summer. The summer straddle looks fair to me, I think money can be made owning it through disciplined gamma trading and selling into the occasional vol pops that I still think will happen when live put or call buyers come in. For those with patience I would be a selective buyer of JV vol - very selective - particularly puts - though not wing puts that are already decently skewed. I still think there is room for the summer vol to test its recent lows so I need to reiterate the “patience” part. The $2.50 strike is appealing to me because I think it gives you ammunition to sell $2.00 and $2.25 puts if/when funds come in to buy them.
  • As H8 vol and futures took it on the chin some of that weakness appeared in Q1 2019 vol as well. There was also significant pressure on X8 and Z8 vol though those appear more linked to JV8 than anything past it. X went from premium to discount in vol terms compared to V. I think the X puts are cheap relative to U and V puts and an V/X straddle spread under .03 is a good risk/reward buy.
  • The J/N/V futures butterfly has quietly moved out near .10, I would put in a scale to exit any longs between .11 and .15 with a .07 stop now.
  • The very sharp put skew I had mentioned in the summer $2 line has come back in line so I no longer view 1 by 2 put spreads using that strike as a short as compelling buys.
  • Pressure in longer dated vol has been seen as calendar straddle strip spreads (selling) has left everyone wary about holding vega. In such an illiquid environment it’s akin to a game of hot potato with everyone blindfolded and scared of what might happen when that music stops.
  • Outside of the spot H straddle and what I view as an inexpensive X straddle (as compared to U and V), I would be less aggressive in positioning until H expires - particularly long vol positioning.

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

FEBRUARY 14, 2018 

  • Since my last commentary we’ve seen another slide in spot futures as we have settled in (for now) in a $2.55-$2.65 range. H/J has gone contango as winter is “over”. The HZ18 futures strip is now trading at levels under Cal19. H vol has traded in the low 30s for a week, with break-evens near $.055.
  • At these levels I think H at-the-money vol is relatively inexpensive; I think a .12 straddle is a decent risk/reward long with 2 EIA numbers remaining until expiration. My own view is that we can still test $2.40 in H, though weather and EIA misses are obvious risks. Skew is fairly balanced in H as wing puts are positively skewed.
  • That leads to the obvious question about JV vol given that straddle strip is roughly 0.33 and the summer vol curve has a fairly flat shape. That is a trickier proposition because (as many traders have suffered through these past couple of weeks) the heaviest options flow has almost exclusively sold vol through 1 by 2s, 3-ways, etc. in the summer. The summer straddle looks fair to me, I think money can be made owning it through disciplined gamma trading and selling into the occasional vol pops that I still think will happen when live put or call buyers come in. For those with patience I would be a selective buyer of JV vol - very selective - particularly puts - though not wing puts that are already decently skewed. I still think there is room for the summer vol to test its recent lows so I need to reiterate the “patience” part. The $2.50 strike is appealing to me because I think it gives you ammunition to sell $2.00 and $2.25 puts if/when funds come in to buy them.
  • As H8 vol and futures took it on the chin some of that weakness appeared in Q1 2019 vol as well. There was also significant pressure on X8 and Z8 vol though those appear more linked to JV8 than anything past it. X went from premium to discount in vol terms compared to V. I think the X puts are cheap relative to U and V puts and an V/X straddle spread under .03 is a good risk/reward buy.
  • The J/N/V futures butterfly has quietly moved out near .10, I would put in a scale to exit any longs between .11 and .15 with a .07 stop now.
  • The very sharp put skew I had mentioned in the summer $2 line has come back in line so I no longer view 1 by 2 put spreads using that strike as a short as compelling buys.
  • Pressure in longer dated vol has been seen as calendar straddle strip spreads (selling) has left everyone wary about holding vega. In such an illiquid environment it’s akin to a game of hot potato with everyone blindfolded and scared of what might happen when that music stops.
  • Outside of the spot H straddle and what I view as an inexpensive X straddle (as compared to U and V), I would be less aggressive in positioning until H expires - particularly long vol positioning.

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

FEBRUARY 14, 2018 

  • Since my last commentary we’ve seen another slide in spot futures as we have settled in (for now) in a $2.55-$2.65 range. H/J has gone contango as winter is “over”. The HZ18 futures strip is now trading at levels under Cal19. H vol has traded in the low 30s for a week, with break-evens near $.055.
  • At these levels I think H at-the-money vol is relatively inexpensive; I think a .12 straddle is a decent risk/reward long with 2 EIA numbers remaining until expiration. My own view is that we can still test $2.40 in H, though weather and EIA misses are obvious risks. Skew is fairly balanced in H as wing puts are positively skewed.
  • That leads to the obvious question about JV vol given that straddle strip is roughly 0.33 and the summer vol curve has a fairly flat shape. That is a trickier proposition because (as many traders have suffered through these past couple of weeks) the heaviest options flow has almost exclusively sold vol through 1 by 2s, 3-ways, etc. in the summer. The summer straddle looks fair to me, I think money can be made owning it through disciplined gamma trading and selling into the occasional vol pops that I still think will happen when live put or call buyers come in. For those with patience I would be a selective buyer of JV vol - very selective - particularly puts - though not wing puts that are already decently skewed. I still think there is room for the summer vol to test its recent lows so I need to reiterate the “patience” part. The $2.50 strike is appealing to me because I think it gives you ammunition to sell $2.00 and $2.25 puts if/when funds come in to buy them.
  • As H8 vol and futures took it on the chin some of that weakness appeared in Q1 2019 vol as well. There was also significant pressure on X8 and Z8 vol though those appear more linked to JV8 than anything past it. X went from premium to discount in vol terms compared to V. I think the X puts are cheap relative to U and V puts and an V/X straddle spread under .03 is a good risk/reward buy.
  • The J/N/V futures butterfly has quietly moved out near .10, I would put in a scale to exit any longs between .11 and .15 with a .07 stop now.
  • The very sharp put skew I had mentioned in the summer $2 line has come back in line so I no longer view 1 by 2 put spreads using that strike as a short as compelling buys.
  • Pressure in longer dated vol has been seen as calendar straddle strip spreads (selling) has left everyone wary about holding vega. In such an illiquid environment it’s akin to a game of hot potato with everyone blindfolded and scared of what might happen when that music stops.
  • Outside of the spot H straddle and what I view as an inexpensive X straddle (as compared to U and V), I would be less aggressive in positioning until H expires - particularly long vol positioning.

FEBRUARY 14, 2018 

Since my last commentary we’ve seen another slide in spot futures as we have settled in (for now) in a $2.55-$2.65 range. H/J has gone contango as winter is “over”. The HZ18 futures strip is now trading at levels under Cal19. H vol has traded in the low 30s for a week, with break-evens near $.055...

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