The Heller Angle – July 7th, 2020

NG is up significantly from the bottom, so much so in fact that it touched the 50 day SMA in both August NGQ20 and September NGU20 much faster than I thought. As I said in previous posts I am interested in slowly selling credit spreads as we get to the first SMA on the call side. I am still very bullish in the medium and longer term, but this gives us the opportunity to slightly balance the position and ideally pick up option premium on both sides.

Remember that 5 days ago NGQ20 straddle prices at 1.72 were 0.24 when I sold new put spreads. Today 5 days later with NG at 1.88, straddle prices are still at 0.24. The percentage of 0.24 / 1.72 (13.9%) vs 0.24 / 1.88 (12.8%) is obviously less but premiums have stayed closer due to an increase in volatility. I haven’t talked about volatility at all in my posts but historical volatility is shown in the charts I post. Historical volatility has more than doubled since it bottomed 2 weeks ago.

Walking through my usual trade setup, I like to sell credit spreads with a width of 0.15 with the first leg at 1.5x the current straddle price. With NGQ20 at 1.88, I see 1.89 straddles trading for ~0.24. 1.5x this price would equal 0.36 + 1.88 or ~2.24 for the first leg. The current bid / ask for 2.25 x 2.40 is 0.008 / 0.010 and I have placed orders to sell at 0.009 and 0.010. Side note, I have no idea why there are strikes at say 1.89, 1.72, and 1.67 for example but otherwise at 0.05 increments. If anyone does know why, I’m definitely curious and would love to hear from you.

As far as the chart, the 50 day SMA could also stop the rally like it did today. 2.00 NG might also be a psychological barrier to the market. The 200 day SMA should help protect and slow down the rally as it gets to 2.15. Lastly, there is plenty of congestion from the recent highs in April and May at 2.20-2.35ish. I like the trade here but momentum is still increasing on the MACD. I am selling these slowly and might sell more later this week depending on the price action. Also, for those that are more conservative, one might avoid selling the NGQ20 2.25 x 2.40 and instead look to sell September instead so that the trade can be higher than the most recent highs.

Walking through my usual trade setup, I like to sell credit spreads with a width of 0.15 with the first leg at 1.5x the current straddle price. With NGU20 at 1.95, I see 1.95 straddles trading for ~0.35. 1.5x this price would equal 0.52 + 1.95 or ~2.47 for the first leg. The current bid / ask for 2.50 x 2.65 is 0.009 / 0.011 and I have placed orders to sell at 0.010 and 0.011. As can be seen on the charts, the first leg 2.50 is above the most recent high of 2.499 that was rejected with the red candle on 5/5/2020.

I sold both August and September call spreads but my deltas are still long. I sold a small amount, enough that it makes a difference but with the ability to add to the positions later. Lastly, I had some internet problems this morning so hopefully anyone following along and watching the 50 day SMA numbers got a better price than me.

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The Heller Angle – July 2nd, 2020

My plan was to write at least once a week but that has obviously fallen off track. As far as fundamentals and price action, I’ve been dead wrong. I expected production to fall slowly by approximately 0.5Bcf per month, which I thought was conservative based on the EIA drilling productivity reports.

Instead, production has increased in the last month by 2Bcf from the bottom as oil prices came back faster than expected which caused more wells and their associated gas to come back. NGL prices stayed strong on a relative basis throughout, perhaps someone like EQT (even though they are mostly dry gas) and CNX (along with private company that uses CNXM pipes) kept more production online than expected. I know smaller company MR also said that their shut in due to low condensate prices was relatively short.

On the demand side, LNG demand is lower than I expected with more cancellations. Jeremy has covered this well and I have mentioned it that storage tanks are just too high across the world. The main reason that storage is too high is due to a warm winter across the world, obviously Covid-19 didn’t help either. When I look towards the winter months, LNG prices are strong enough to move demand back towards exporting 9Bcf that we were doing earlier this year. This will help the market tremendously, although some pricing is already expected by the NG strip. I continue to be remain bullish in the medium and longer term in part due to the market rebalancing. I am bullish short term too but continue to stay cautious due to unknowns around demand during Covid-19.

One of the reasons I am an option writer is that I can be wrong in the direction and still make money. Because the credit spreads I sold in puts in July NGN20 were far enough away, I was able to stay out of the noise and these options expired worthless. With the drop of NGN20 below 1.50, the August puts that are still open felt a little closer than I would have liked. The second advantage of being an option writer is that I already knew my risk going in as it was defined by the second purchased put. There would be no stop run or forced getting out by broker, I knew my max exposure. This positioning allows me to not worry about a current position and to think clearly if I want to make any new trades.

I think the large part of the drop on the +120Bcf storage number was due to a large number of traders and / or funds being forced to reduce risk at what looks like the worst possible time. Even though there was a large drop, I did not add any additional exposure. I wanted to see if the weakness in the storage report was a 1 week anomaly. With the storage report today, I view the last 2 reports as offsetting each other and view 6/25 as an anomaly.

While the MACD crossover to the green did not work when I posted on 6/11, MACD has now made another crossover this week. With the storage report and my view of the chart below, I am comfortable adding to my exposure to start replacing expired July NGN20 positions. With NGQ20 currently 1.729, the 1.72 straddle strike is being priced at 0.24. I am comfortable being 1.5x straddles away or 0.36 which allows me to sell another 1.35 x 1.20 put spread. The current bid ask was 0.007 – 0.009 and I was able to fill at 0.008 within about 10 minutes of placing the order. With 26 days to go and using commissions of $3.00 per leg, the total return is $74 / 1426 = 5.2% return.

Looking at the chart linked below, I see a MACD divergence with prices significantly below the 1.85ish level. If we discard the big break from the storage report, the chart looks like it may hold 1.65 – 1.70 level. Notice that the decline from 1.65 did not act as resistance on the way back up. That to me shows strength at these levels which is why I’m comfortable selling put spreads below the market.

On the call side, the market is too far away from the 50 or 200 day SMA to really interest me in selling call spreads at the current time. Since I started writing, I have not sold a call spread although I do like to be on both sides during injection season. I am watching now how the market acts at 1.85-1.90. I see a lot of congestion / resistance in March and then a smaller amount where the first yellow line I drew in mid May. If the market does not act well there, I might try to sell a call spread, especially if I feel like I can write above the 200 SMA pink / purple line. If the market acts well and does not seem to struggle at 1.85-1.90, then I would keep being patient and look to sell call spreads as the market approached the 50 day SMA. Since I’m bullish, I would be more cautious writing call spreads.

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The Heller Angle – June 11th, 2020

Fundamentally I continue to be bullish in all time frames, although most cautious in the short term (1-6 months). I think the market has already priced in weak demand and producers are shutting in production or deferring as much as they can into higher priced months in the fall. I am most concerned with short term demand as many places in the US are seeing a rise in Covid-19 cases again. There are a lot of unknowns and how people react. How much of the population self quarantines? Do businesses get shutdown temporarily if there is a known case in their building, plant etc to slow the spread? Or (less likely in my opinion) are new lock down orders put into place in hot spot areas? I really do not know what is going to happen in a potential second wave of infections. This is why I advocate to stay conservative in my trading positions in the short term.

When my fundamental view aligns with a MACD cross over, I would normally get more bullish by writing put spreads closer to the market. I would also look for opportunities to buy call spreads if I could get the risk/reward right in my mind. I might also go out past 60 days.

Today the MACD crossed over for the first time since early May. While no indicator has a perfect batting average, MACD signal has worked for me when pairing with my fundamental view.

The 1.90 straddle in NGQ20 is trading for just under 0.31 as I write. I want to be at least 1.5x or approximately 0.45 away so I am looking at credit spreads at 1.45 or below. Here is my trade. Sell the August NGQ20 1.45 x 1.30 put spread for 0.010 (filled). I also put in an order at 0.011 to see if I can get hit overnight with any drop. Otherwise, I will probably move this to 0.010 tomorrow.

Even though I am not putting on an aggressive bullish trade, let’s look at a long call spread setup to monitor and learn from. Looking at the chart again, I see potential resistance at the 50 day SMA or 2.073 as well as stronger resistance at the 200 day SMA at 2.215. Another thing I look at is the at the money call which is approx 0.15 (or 0.5x straddle as the other way to look at it) so that I don’t pay too much premium. If I am buying premium, I also want to receive a minimum of 3x max profit as some trades simply will not work. With a 1.90 call at approx 0.15, I am looking at the 2.05 call for 0.094 while selling the 2.20 call for 0.050 for a net premium of 0.044. I really like this trade setup as I like buying the call below where I think some resistance could be while also selling a second call to offset some of the premium at a second resistance area. I am using bid / ask middle but I might need to pay 0.045 or 0.046 to get this off in real life.

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The Heller Angle – June 2nd, 2020

As I’ve posted previously, I am concerned about the short term fundamentals of NG while being bullish in the medium term. After watching the market for the week (sorry it took me a week between posts!) we can see that NG supply increased by ~2Bcf while LNG exports also declined by ~2Bcf as well. It also seems like LNG exports will get worse before the get better in the fall which feels pretty far away right now.

I’ve been trading conservatively, in part due to oversupply from a warm winter worldwide as well as risk from Covid-19. In previous years, I tend to write credit spreads at ~1.0x straddle prices. Whereas this year, due to my perception of higher risks, I’ve been selling ~1.5x straddles away.

I currently have NGN20 July put spreads sold as a credit and I never was able to sell offsetting credit spreads as the market has just not rallied enough. Where I’m comfortable selling call spreads, the premiums are not worth the risk in my view. That is okay in my view, as I will wait until either my view changes or the market comes to me. With July expiration starting to get close at 23 days away, I am now starting to look at NGQ20 August put spreads.

Below is a chart of NGN20 of what I am looking at. I try to keep my chart pretty simple and am just looking at the 50 and 200 SMA along with MACD and historical volatility. Note that I am looking at NGN20 vs just NG which would be the continuous contract. The MACD indicator due in part to contango or backwardization can sometimes skew MACD and historical volatility indicators.

As I said above, I am still in the bullish camp for fundamental reasons. Even though NGN20 broke below support at 1.80, I see that selling is seeming to reach exhaustion. MACD while still below the zero line is starting to climb. Due to my fundamental view and this price action, I sold today August NGQ20 1.35 x 1.20 for 0.010. As MACD climbs above the zero line, I plan to add to this position again.

As far as the SMA 50 and 200, this is where I would be looking to sell a call spread if we reached that line. NGN20 is at 2.006 currently while NGQ20 August is at 2.086.

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The Heller Angle – May 25th, 2020

I’m sorry I missed posting on Friday. I never want to write something if I have nothing interesting to say. I remain bullish on the market but am concerned about short term demand risk from shutdowns in the US. Even as the US opens back up county by county and state by state, there are many who will continue to self-isolate which hits demand.

Much to my surprise this weekend, it looks like natural gas supply is back above 89Bcf from a low of 87Bcf (from my preferred provider). I want to see a few more days of this production to confirm this data is true (and not something odd from modeling a 3 day weekend). If these production numbers are true, I would expect to be a little less bullish going forward. Another confirmation from a technical perspective would be to see price action drop below 1.80 on NGN20 July.

I also continue to be concerned about demand for LNG exports. Along with a surprise from the supply side, I am also watching a small bump in LNG exports back to the 6Bcf level. Just last week I was saying I was worried about demand going towards 4Bcf which I am still concerned about. One thing we know in natural gas land is that the market is always throwing us curve balls.

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The Heller Angle – May 21st, 2020

NGN20 is back towards the previous lows of 1.802 on March 16th and the recent low of 1.822 of just last week. As I write, NGN20 is trading at 1.841. I’ve written mostly about supply so far and since my first post supply has fallen further to 87.0Bcf. With the decline in production and the price for the 1.35 x 1.20 put spread again at 0.011, I feel comfortable adding to this position and selling another credit spread.

The last thing I want to do is advocate adding to positions just because the price moved against my previous trades. By trading small and knowing the max risk with an option spread trade, we can think clearly and logically and say has my view changed, do I like the position better? This way we can add to a position from strength and not from weakness. Markets will move against you and a trader needs to maintain discipline by knowing the max risk beforehand so that he/she can trade with a clear mind.

If supply had increased, or if the storage report today at 81Bcf came in higher, by no means would I add to this trade. Frankly, I’d look to sell a call spread to help move more towards a delta neutral strategy. Since I am still bullish, I am content to wait on the call side. Hopefully the market gives us another opportunity in the future, but if not than so be it. I will take the opportunities that the market gives me.

Jeremy made some good points on why the demand side is probably causing the weakness in price. With oil prices rallying back above $30 WTI, more associated gas production that was shut in due to oil will come back into the NG supply. I’m not sure when but there are good arguments that the supply will be back closer to July vs June. The arguments I’ve seen discuss how physical commodities are nominated for transport on pipelines. Being a financial player only with no physical commodity experience, I cannot opine on the truth of this statement and will monitor.

The other bearish discussion coming out of the market are more LNG cargo cancellations. This discussion has been out in the market for a while, but the demand side seems to be getting worse. As recently as a month ago, the consensus seemed to me that LNG exports would bottom at 6 Bcf. There is now discussion that exports could potentially drop under 5Bcf and possibly as low as 4Bcf. I saw a twitter post saying the Europe gas was down big again today, but have not been able to verify yet with additional posts.

Trade 3 – Sell 1.35 x 1.20 July puts for 0.011 credit (filled).

I seek out all feedback especially push back if you are bearish on NG. I’d love nothing more than to change my view if I am wrong. Please send me a tweet publicly or privately @jrhngc

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The Heller Angle – May 20, 2020

NGN20 July did another test of the level reaching a high of 2.028 but not quite getting to the 2.04 – 2.10 I was looking for. I see that area as congestion with the first test in mid March, testing again the first week of April before breaking through later. Looking at the chart again, I’m surprised I didn’t notice it before, there is a big candle reversal on April 27th where the low is 2.025. Instead of 2.04, which was the 200 day SMA, I am now going to use 2.025 as to where I’m trying to sell a call spread. Also the 200 day SMA has now moved down to 2.027 since then.

Honestly, I feel dumb that I missed this before but I would argue that if the market doesn’t make you feel dumb a few times each week, you might be doing something wrong. Obviously we’ve seen 3 tests of that level and today seems like a solid rejection.

So I’ve moved the limit price of my call spread (2.50×2.65) down slightly in hopes I catch it if we get another rally and test this Thursday or Friday.

Fundamentally, I think we should be rallying so I’m not sure why the reversal today. Weather overnight was slightly bearish but almost a nothing burger in my mind. Supply continues to come down, the latest report I’m seeing now is 87.0Bcf. The NG producers are on our side in that low prices delays completions to later this year, choking back where they can, delaying repairs and workovers if it doesn’t damage the well.

We received confirmation of this view with EQT shutting in 1.4Bcf per day confirmed by an SEC filing with ETRN.

https://seekingalpha.com/news/3575651-equitrans-top-producer-customer-to-slash-natural-gas-output

Because I am still bullish and think this decline back below 1.90 is unjustified (1.885 low today so far, currently 1.911) I’m looking at selling another put spread. Same setup as before, 1.90 straddle is going for approximately 0.35 I want to sell at ~1.5x away (or 0.525) so I’m looking to sell the 1.40×1.25 for a credit of 0.011. After sitting between the bid of 0.010 and ask 0.012 for over 10 minutes, I moved my order to 0.010 for an instant fill.

In my first trade that I posted on our NGetf.com website, I accidentally only used 1 commission as I normally don’t do these calculations every time (oops sorry). This trade calculation is correct (thank you for the reader who pointed this out) $94 / $1406 is a return of 6.7%. Expiration is 36 days to go.

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The Heller Angle – May 19, 2020

We didn’t quite make it to 2.04 line this morning in July NGN20, so I continue to monitor.

On the EIA DPR report, there wasn’t any huge insights by me why the declines are modeled lower with less drilling. I think that a change in total production is the main cause as can be seen in the screenshots below. April DPR report models show May production at 83.16Bcf; May report models show May production at 82.25Bcf.

April 2020 Drilling Productivity Report for April by EIA.gov
May 2020 Drilling Productivity Report by EIA.gov

Remember that this is from 7 regions so total production is higher. I still think my argument of 1Bcf declines per month going forward is valid but even if we are more conservative at 0.5Bcf, supply is going to become a serious problem later in the year. Prices will need to go higher to reduce demand as supply keeps falling. The market is pricing this in on the strip and with oversupply from a warm winter this seems enough to balance the market for now. The market is relatively smart and knows this information, but what we don’t know is if the price increase is enough. I’m of the opinion no, because the strip and prices in 2021 and especially 2022 need to move higher. We will talk about the implications of this and the way to play it (NG producers vs futures / future options in future posts).

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The Heller Angle – May 18, 2020

Please forgive me for I am posting this from my phone with no edits, still the same great information.

NG rocketing higher today on a decent sized drop on production. The source I follow BlueGold Resources (no affiliation I’m just a subscriber of their service) is reporting a decline in supply of approximately 1.4Bcf. From what I’ve seen / heard, Point Logic (which also reports EIA data) reported a bigger drop, but that was in part due to them reporting a higher initial production on Friday. While the drop in supply is real, I think it is less and Point Logic (while very good) is lagging a little bit here. There are also rumors of supply shut-ins which make a lot of sense to me as well. Either way, supply is dropping. As I mentioned in my last post, EIA DPR is showing a decline of 0.89Bcf per day decline over the month of April. May is now out (https://www.eia.gov/petroleum/drilling/#tabs-summary-2) and I’m quite surprised that the report is only showing 0.78Bcf for May. I’m digging deeper now to see if I can understand why. I really thought the report would show >1Bcf.

As far as trading, I was also monitoring the 2.35×2.50 call spread for NGN20 (July) to sell as prices approached 2.04-2.10 with the current price of 1.966. The credit spread received was 0.014-0.015, with the increase in NGN20 that credit spread is now trading at 0.020-0.022. This is why I stay patient and wait for the market to come to me. I won’t always be right of course and sometimes waiting will be the wrong move. If you miss a trade, that’s ok the NG market gives a lot of opportunities. As I’m ‘preaching’ now, no trade for me, I’m hoping to get some follow through tomorrow that pushes the NGN20 to 2.04-2.10 and I can sell a credit spread above 2.50 where I feel that the market won’t move in 40 days.

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The Heller Angle – May 15, 2020

Let me talk a little bit about how I am thinking about the NG market heading into summer and fall. Covid-19 is making me trade much smaller. It’s tough to say how much demand is growing/shrinking, and how quickly. LNG demand is down from all time highs of 9Bcf to the latest reports of around 6Bcf. We also see some weakness in industrial and residential (2-4Bcf). This demand destruction is definitely bearish and a big reason we are trading under $2 NG. Offsetting most of this demand destruction has been that supplies have fallen a similar amount. The sources I follow show a decline of 7.5Bcf in supply in the US. I believe that the LNG decline will be shorter term in nature and will come back and make new highs in the winter. Yes it might not be a fun 6 months for NG bulls, but the longer term view is bullish (10+ BCF LNG exports). The difference here is that I don’t see supply coming back quickly. I’ve read all the latest conference calls from EQT, AR, RRC, COG, SWN, CNX, MR, GPOR, and CRK. All of these producers are focused on Free Cash Flow and the group will barely grow its production. This small production growth is not enough to offset natural declines elsewhere. Most of these names have debt / balance sheet issues that they are cleaning up. We can also confirm the decline in supplies as sustainable by the Baker Hughes Rig Count and Primary Vision Frac Spread Count https://twitter.com/PrimaryVision. I also use the EIA DPR Monthly report to confirm these views https://www.eia.gov/petroleum/drilling/#tabs-summary-2. The DPR report is showing NG production declining by 0.86Bcf per month and is accelerating from lower Rigs and Frac spreads (can confirm by looking at March report and seeing a decline of 0.19Bcf per month). I am expecting to see a decline of over 1Bcf per month in the next EIA DPR report in a few days on the 18th.

NG market pretty quiet today and I am content to let my NG put spreads to slowly decay. I am still looking for 2.04-2.10 to sell a call spread. While we wait, let’s look at the call side, just in case the market ramps next week (my view) versus making the trade today. NGN20 is 1.854 with a straddle price at 1.85 of approximately 0.34 (same as Wednesday). As always, I want to be out of the noise and be 1.5 straddles away or approximately 0.51. If we were to sell the 2.35 / 2.50 call spread today, we would expect to receive 0.014-0.015. That is a solid return but let’s just watch it. I feel more comfortable selling call spreads above 2.50 and ideally above 2.75 later this summer.

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