Mar 3, 2020

Valor View – NG – Mar 3 – Volatility continues – F/G, J/V CSO discussion

• Volatility continues in the natural gas market both in futures and implied vol
• There was a small expectation that implieds will taper off with the rally and it was true till early morning, but vol rallied later in the day
• With both prices and vols going up, break evens are reaching 5+ cents and the market believes they are justified for now with everything going on currently
• Couple of CSO trades in the Top Trades caught our eye
• F21/G21 0.20 call traded 1cent
• J20/V20 0.25 straddle traded 7.2 cents

• With F/G trading at 3 cents, we were of the opinion that F/G itself will act like a call option with limited downside from here
• Paying 1 cent for a 20 cent call seems expensive given that there is potentially only 1-2 cent downside in the spread at least until beginning of winter looking at last 2 years
• Only way the call would make more sense is if the spread were to be more volatile this year and potentially going into contango before winter

• J price has been much more volatile than the J/V spread as the big move down and up have been pretty much flat with spreads not moving as much
• Given the -21 to -29 range we have seen lately for J/V the 7.2 cent straddle seems expensive
• Our take away from the trade is that traders are possibly expecting cash to get much weaker and the spreads moving much more going forward