NG July October Spread

On Feb. 15,? we had written about a very large options trade in the July October NG spread, in which one party had sold the 10 cent call and bought the 20 cent put option for the spread. At the time, the option strategy was worth 1.5 cents premium for the put purchase versus the call sale. This strategy for the buyer of the put meant that they see the spread widening to more than 20 cents rather than narrowing to less than 10 cents.

At the time, the July October futures spread was valued near 16 cents. Currently, the daily chart shows three sessions with lows at 16.2/16.3 cents for the spread. Price action now suggests that the spread is in a range between 12 and 16 cents. Momentum is positive, thus favoring the July for now.

The announcement by Chesapeake Energy that it will reduce capital spending and thus produce 20% less gas this year has caused the curve to tighten quite a bit. But, the June through October strip outpaced the rally in the front end of the curve since the announcement, as the market sees the lower supply having an effect in mid-year after the current storage excess is worked off. Today, that trend has been reversed as some front end short covering is likely at work.

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