As winter slowly moves upon us, we can see traders moving into natural gas futures and related plays with more strength. Thus, let's consider how to trade options in Cheniere Energy. This column focuses on a calendar spread strategy in LNG stock.
The natural gas space is certainly lifting but when it moves extremely quickly, it tends to retrace. This retrace gives us opportunity for revenue stream using options while still positioning for upside.
Therefore, energy remains a sector that I will lean on in the coming months, using dips and spikes to position for returns to the portfolio.
As for LNG stock and its group leadership within IBD's oil and gas transportation and pipeline industry? Not as well ranked as some of its competitors like DHT, Euronav or Frontline. But the options chains are much more liquid and the price action is exactly what I am looking for over the longer time frame.
Plus, the 93 Composite Rating in LNG is nothing to gloss over.
We are going to use the calendar spread. This anticipates a retrace of motion over several months before the price in LNG stock are established higher.
LNG Stock Today: Long Call Calendar Spread
Please note that earnings are out Nov. 2, so we could see a major gyration in price. If you are inclined to wait after earnings, this trade will also hold nicely. Yet perhaps the strikes at the most favorable price near 170 might offer a gift from the market gods.
As the price of LNG stock sits right now, consider this trade suggestion:
- Sell to open 1 LNG Nov. 17-expiring call with a 180 strike price
- Buy to open 1 LNG Dec. 15 180 call
This will create a debit event of $2.15, so the trade costs $215 per set of contracts. We calculate the break-even price at 182.15, or the option strike plus the paid premium.
Buying a call calendar spread allows us to position for further upside in a stock while anticipating a minor pullback. This is a bullish position and requires a debit (meaning we pay for it) and our total risk is upfront. At no time will we incur more risk than the original outlay.
Also, we are selling a call strike out of the money and assuming the stock will not rise over 180 before the call option's Nov. 17 expiration. But we also expect LNG stock to rise later on into the time frame, allowing us to position well for the option expiration on Dec. 15.
Fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD. The option toolbox also gives me a great advantage studying the many ways to extract money and position myself in the market.
Trade Management
First off, let's identify key chart levels.
Weekly support in LNG stock appears to sit near 160. Meanwhile, 182 stands over the stock as near-term resistance. Please see MarketSmith for the clean lines showing this range. But our goal with the long call calendar: allow theta or time decay to allow us to be paid for the time in the chart, as well as an anticipation of a fade in price in the near term.
Let's also consider these scenarios for the long call calendar spread:
- LNG stock grinds lower but does not break the 160 price level for more than three days. This action gives bottom pickers time to engage in support behavior. If Cheniere stays below 160 for more than three days, we must exit the trade.
- Stock grinds higher but does not break 180 before November's expiration. This means the Nov. 17-expiring call will expire worthless. We are now positioned to create revenue and returns from the remaining December option. Rewards have no sealed upper bound here. That's ideal as a stock continues to rise.
- LNG shares break higher, stay above 180 before November's expiration. This means the short call will be in the money and we will have to exit the trade by closing both legs. Again, your maximum risk in this configuration will be the amount we paid to enter the trade.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
