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Cheniere Energy Option Players Bet On a Big Move Higher

Short sellers may be hedging their bets with LNG calls

by 12/7/2012 11:13 AM
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Option traders have displayed a growing affection toward Cheniere Energy, Inc. (NYSEAMEX:LNG - 17.87) calls in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio has soared to 17.25, from its 50-day call/put volume ratio of 6.25. This shorter-term ratio ranks higher than 93% of other such annual readings, suggesting calls have been bought to open over puts at a near annual-high clip in the past two weeks.

Echoing this trend is LNG's declining Schaeffer's put/call open interest ratio (SOIR). Since Nov. 19, the stock's SOIR has dropped to 0.37 from 0.41, as near-term call open interest has jumped 18.1%. This ratio currently ranks in the 20th percentile of its annual range, suggesting short-term speculators are more call-heavy than usual toward the stock.

Calls are easily outpacing puts in today's session. At last check, roughly 13,000 contracts had crossed the tape, representing more than five times the average intraday volume for call options. Meanwhile, fewer than 1,500 put contracts had changed hands. The January 2013 21 call has emerged as the most active strike thus far. Of the nearly 7,300 contracts traded, 99% have done so at the ask price, and volume is easily outstripping open interest -- two indications new positions are being initiated here.

By buying these out-of-the-money calls to open for a volume-weighted average price (VWAP) of $0.39, speculators will begin to profit with each step north of $21.39 (the strike plus the average premium paid) LNG takes through Jan. 18. This breakeven level represents a 20.2% premium to the stock's current perch.

Technically, LNG has had a strong run on the charts in 2012, with the shares more than doubling in value on a year-to-date basis. However, the stock has been prone to big price swings, as evidenced by its wide annual low-to-annual high range ($7.86 on Dec. 15 vs. $18.92 on Apr. 27). More recently, the equity has been in an uptrend, and over the course of the past 40 sessions, has outperformed the broader S&P 500 Index (SPX) by almost 15 percentage points.

Given LNG's technical uncertainty, this recent uptick in call volume may simply represent short sellers hedging against their pessimistic positions. Short interest rose by 8% during the last two reporting periods, and now accounts for a lofty 14.5% of the stock's available float. It would take more than four sessions to cover these shorted shares, at the equity's average daily pace of trading.

To the delight of shorts, LNG was last seen down 0.7%. The stock's Relative Strength Index (RSI) of 65 is teetering near overbought territory, though, suggesting today's consolidation may have been in the works.


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