Open interest in the $10 natural gas strike calls for this winter have ballooned over the last two weeks… from 1,783 to 11,051 in the January 2010 and from 881 to 8,848 in the February 2010. With the respective premiums trading in between $0.05 and $0.06 at the time of this jump, this “trade” amounts to a $9.5 million lottery ticket.
That is one way to look at it. Another way is to say, the trader(s) who wrote those calls just might think this is the easiest $9.5 million they ever pocketed. For instance, if you bought ATM January calls for $0.647 last night the $10 odds are greater than 6-to-1 against you. In other words, if you think there is better than a 16% chance January gas can move from $5.334 to $10 between now and December, then this trade is for you (16% × $4.019 payoff = $0.683 > $0.647 call premium).
Furthermore, if you go back seven years ago, to August 2002, the last time spot NYMEX Henry Hub gas traded below $3, you will see that six months later spot gas tied the previous high, $10.10. Therefore, you might surmise that the odds of a repeat of 2002 are better than 6-to-1. The only problem is, in February 2003 the market was rigged. It was mugged. It was hijacked by some thieving bastard(s). Thus, unless this/these same bastard(s) is/are back buying $10 strike calls with designs on rigging the gas market once again, we doubt the odds of a repeat are as short as 6-to-1.
So what happened back then in late February 2003? Spot gas (Mar’03) was trading in the low $6s on Friday morning, February 21st. Shortly after the NYMEX pits opened a propane barge exploded (within view of the NYMEX) at Port Mobil, Staten Island. This event provided a significant knee-jerk spike in the market, but by the time we went home for the weekend the market was well off its highs....MORE
Friday, August 28, 2009
Natural Gas: "What Are the Odds?" (of a double on the Jan. contract)
From a guest post by Stephen Schork at CNBC: