US Nat Gas – Who is in pain?

Nat Gas Winter/Spring spread blow up.
NG flat price exploded.
NG Option Vol = skyrocketed.

Someone is in pain.

NGH19 – NGJ19 spread = +1.58 … levels only seen when flat price was much higher (base).
NGH19 / NGJ19 ratio = 1.54 … very close to all time highs.

There’s a trade here, but the main Q is… when?

1/ Winter hasn’t even arrived and the inventory level is historically very low, so there’s a lot of time for more pain if winter is crazy cold.
2/ But if more pain comes, it’s likely that J19 flat price just explodes upwards too.

So… at what level do you want in?

a/ When markets get to crazy levels in commodities it’s likely someone is in deep pain out there. Until such fellas don’t show up as dead bodies, it’s hard to pinpoint a top/bottom in spreads.
b/ Thus position has to be in a size that leaves room for adding to it at better level, despite P&L pain, or to just ride it out.

It’s not a trade to try and be a hero in my view. But a great r/r nonetheless.

Sell NGH9NGJ9 spreads @ 1.40 to take it to expiration.

P(3.50) = 10%, lose 2.1.
P(0.10) = 50%, make 1.30
P(0.50) = 40%, make 0.90

E[r] = -21c + 65c + 36c = +80c.

Can you take the heat?

Cure for high prices = high prices
-> Kills demand
-> Helps with supply.

There are short-term bottlenecks in both production and in pipeline capacity to deliver NG to Henry Hub.

But @ 1.39 it’s historically crazy high to dismiss.


Feel free to get in touch. I will surely answer you when I find some time. A brief introduction would be welcomed.