Bulls look for liquid gas breakout
05/25/17

Oil may be in the news this morning, but options traders focused on a different kind of energy stock yesterday.

Liquefied natural gas was a dream for decades. Now it’s becoming a reality, with U.S. exports of the compressed fuel up more than 1,000 percent in the last year.1 Cheniere Energy (NYSE: LNG) is the main company driving the boom so far.2

Options traders piled into the name on Wednesday, amassing July 55 calls in hope of a potential breakout this summer. They started nibbling small blocks of contracts for about $0.50 in the first hour of the session, followed with bigger chunks for $0.60, and kept buying as premiums rose to $1.08 in the afternoon. More than 24,000 contracts changed hands by the closing bell, making them one of the busiest options across the entire market during the session.

Calls fix the price where a security can be purchased. They can spike up in value if a rally occurs, but also go to zero if the stock doesn’t move. Here are some potential outcomes for yesterday’s activity:

  • If LNG closes at $57 by expiration, the July 55 calls would be worth $2. That would represent gains of 85-300 percent, depending on their entry cost. 
  • Say LNG climbs to $60. In that case the options would skyrocket to $5 and trader would be sitting on profits of 350-900 percent.
  • But on the downside, the calls will become worthless if LNG remains below $55. They’ll break even between $55.50 and $55.90.

LNG closed up 3.73 percent to $50.64 yesterday, and has been on a wild ride all decade. It soared from below $3 in late 2010 to almost $85 by late 2014, then stalled and plunged into the $20s by early last year.

Cheniere Energy (LNG), 1-year chart

Source: OptionsHouse by E*TRADE

Seasoned chart watchers have focused on the $50 mark. LNG spiked to that level in January amid reports that changes to the tax code will encourage exports of American oil and gas.3 It paused for a few months but returned to $50 this month after executives said the company held “extensive negotiations with China” as a potential customer.4 Officials in Washington also want to grow the business as a way of narrowing the U.S. trade deficit and boosting the economy at home.5

Wednesday’s call buyers may be looking for more good news to be forthcoming. This way, they stand to profit if LNG breaks that resistance level—but also have very limited capital at risk if they’re wrong. 

Overall options activity was more than 10 times the monthly average, with calls outpacing puts by a bullish 12-to-1 ratio.

Bottom line: LNG has been trapped below $50 as its key business gains traction, and now traders are looking for a potential breakout this summer.

 

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1. U.S. Energy Information Administration monthly report.

2. Cheniere Energy: Cheniere Energy Celebrates 100th LNG Cargo. 4/3/17.

3. Marketwatch: How a Republican border tax proposal could boost U.S. oil production and prices. 1/25/17.

4. Reuters: Exclusive: Cheniere in talks to boost LNG shipments to China. 5/12/17.

5. Reuters: U.S., China agree to first trade steps under 100-day plan. 5/12/17. CNBC: Trump just gave China a 'sledgehammer' to smash the LNG monopoly. 5/19/17.