Bloomberg reports that funds are the most bullish on European natural gas since the early days of the energy crisis.
I won't debate whether such expectations are justified or not. Instead, I'm intrigued by a large options trade mentioned in the article—a bumper bet on gas prices rallying, according to Bloomberg.
The trade involved buying more than 17,000 €40 call options for October, when the heating season starts in Europe, while simultaneously selling the same number of €25 puts and about half as many futures to hedge it. To a trader, it’s effectively a wager on a price increase this winter that will boost implied volatility.
Whenever I see such news, I always wonder why Bloomberg is confident the trader bought, not sold, the calls?
Moreover, in this case, the trader (likely a fund) opened a short position on 8,500 October futures. This doesn't quite align with the aggregated speculative position statistics.
Counting on a rise in October contracts is quite strange. By October, it will only be clear that European storage is 100% full. Whether that’s enough will depend on the winter, and it will be premature to judge until December.
Considering that call volatility is already significantly higher, such a position requires a hefty premium. Personally, I would prefer the opposite position—receiving a premium and trying to control the delta and vega. In my opinion, that’s exactly what 'the trader' did. A market maker bought the calls, and there are no bumper bullish bets.
If someone just wants to 'buy volatility,' there’s no need to complicate the position.
Is the Bullish Bet on European Gas as Solid as It Seems? A Trader’s Perspective
byu/bitkogan inoptions
Posted by bitkogan
2 Comments
Europe imports more gas than what is consumes. Do you maybe mean gas prices in Europe?
Also, the “whale alerts” are complete crap: as you noted, we don’t know if the hedge funds was the seller or buyer, we don’t know if the trade was part of a hedging strategy or not, and we don’t know if the trade was a lure for stupid “whale hunters”.
As always, I encourage floking away from any information that has potentially zero signal and, in theory, is there to make you part with your money.
not sure what the play is here. do we need to find out which country Europe source the NG from and also distinguish whether it is LNG?