October 14, 2021 –
A Sept. 30 story in OPIS mentioned an upwelling of interest in options, and
specifically in “calls” as a consequence of natural gas prices on other
continents that fetched the equivalent of $150-$200/bbl oil. Offshore natural
gas in Europe and China has continued to flirt with new all-time highs, and a
check of some options’ strategies shows some tidy price appreciation.
Example: Ahead of that story, Powerhouse president Elaine Levin acknowledged an
acceleration of ULSD options or “calls” to guard against budget-busting winter
numbers.
Calls are options to buy futures at a firm price for a one-time fee. The cost
reflects the price target as well as implied volatility and the leverage of
time until expiration. Unlike futures, or even spreads, the cost is limited to
the initial pay-out. If underlying futures prices soar to say 30cts/gal over
strike prices, the option’s intrinsic value rises as well. If underlying
futures values drop below the options’ strike price, the calls expire worthless.
One popular strategy mentioned in the story involved purchasing a seasonal
strip covering ULSD futures from November through March. That’s a period that
roughly corresponds to when most degree days occur and when heating oil demand
is at its most robust.
On Sept. 30, an “at-the-money” call, reflecting an average price of $2.33/gal
for the 2021/2022 winter fetched a price of 16cts/gal. Today, that same strip
commanded 26cts/gal, a rise of 10cts gal. The strip price is derived from the
midpoint of bid and offer this afternoon. A $2.43/gal strip today is priced at
19.25cts/gal. When mentioned in the Sept. 30 story, that same strike was at
11.5cts/gal.
Liquidity in the options’ market remains very brisk as energy prices, and
potential supply problems take front-and-center in electronic and print news.
An OPIS story earlier today mentioned action in $150/bbl and $200/bbl strike
prices for June WTI. The former moved from 6cts/bbl to 22cts/bbl in the last
two weeks while the latter doubled from a penny to two pennies in the same time
period.
Another strategy discussed in the late September story involved betting on
bigger backwardation. If indeed supply constraints develop, the front-month
futures’ price can often escalate by much more than a forward month. On Sept.
30, a marketer could buy a February ULSD futures’ contract at 2.16cts gal above
March. The bet on higher backwardation has already paid off with the spread
widening to 2.73cts/gal. The spread between February and April has really taken
flight with February now commanding a 6.05cts/gal premium.