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Morning Update

One of the top performing sectors during 2013’s stock market rally has been energy. Due to a large supply of cheap natural gas and increasingly accessible crude oil America is well on its way to becoming a net energy exporter by 2020. One company trying to capitalize on this is Cheniere Energy. Cheniere is the only company currently allowed to export LNG and is in the process of building an export terminal. However the company is not expected to show any growth until 2015 at the earliest, which is when gas should begin flowing through it terminal. Nevertheless Cheniere is trading at all-time highs, which spurred one option trader to make a bearish bet on the stock.

The largest trade of the day was the purchase of 5000 April 24/22 put spreads for $0.50 with the stock at 25.00. This fix risk spread will be worth $2.00, making $1.50 profit, if Cheniere is below 22 at expiration, and will incur its max loss of $0.50 if LNG is above 24 at expiration. This is a contrarian play that the stock is overbought and has the potential to sell off into April expiration. This could be a speculative bet or a hedge to a long stock position.

Considering how far off Cheniere’s export terminal is from completion it does not make sense to chase this stock up every day. LNG is 50% above its 200-day moving average, which tells me that the stock is overextended right now. As more investors come to this realization they will stop chasing the stock and it will pull back. This put spread allows you to profit from this by putting risk/reward in your favor.


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