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Cheniere Energy Spread Strategist Expects Near-Term Consolidation

February calls and puts were used to synthetically short LNG yesterday

by 1/8/2013 10:49 AM
Stocks quoted in this article:

Cheniere Energy, Inc.'s (NYSEAMEX:LNG - 20.02) formidable 44% climb off its most recent low of $13.85 (recorded on Nov. 13) seems to have one investor betting on a pullback in the near term. In Monday's session, one block of 6,000 February 22 calls crossed the tape at the bid price of $0.37, while a symmetrical block of February 18 puts changed hands at the ask price of $0.32, resulting in a net credit of $0.05 per pair of contracts. Open interest rose at both strikes overnight, suggesting a synthetic short spread was created using LNG's back-month options.

If this trader is indeed using LNG's options to simulate a short sale on the stock, gains are unlimited as far as the zero mark with each step south of $18 (the long put strike) the stock takes through February expiration. Conversely, losses to the strategy are also unlimited with each step north of breakeven at $22.05 (the sold strike plus the net credit) the equity makes during the next five weeks. The speculator gets to keep the modest initial premium collected as long as LNG finishes between the two strikes by the close on Feb. 15 -- when the options expire.

However, this trade using out-of-the-money options could also be indicative of a shareholder implementing a collar against any near-term consolidation. This strategy uses a covered call to fund a protective put, essentially creating a two-pronged hedge.

Widening the scope shows that traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have been betting bearishly on LNG in recent weeks. The stock's 10-day put/call volume ratio of 0.74 ranks in the 95th percentile of its annual range, suggesting puts have been bought to open over calls with more rapidity just 5% of the time within the past year.

As mentioned, LNG has been tearing up the charts in recent months, including tagging a four-year peak of $20.46 last Friday, Jan 4. From a longer-term perspective, the equity has surged roughly 129% during the past 52 weeks. This trek higher has left the stock's Relative Strength Index (RSI) perched at 77 -- solidly in overbought territory, suggesting a short-term pullback could be in the works.

In fact, the stock has given back 1% in today's session, and was last seen lingering near $20.02.


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