UK, Dutch gas options trading points to Q3 2016 weakness

Open interest on Dutch TTF natural gas options has jumped to a record high in May, driven by trader interest in put options on Q3 2016 delivery periods.

According to ICE data, open interest on TTF options has increased by 25% since the start of May to a record 239,240 contracts. Around a third of these open positions comprise put options for monthly delivery products within the third quarter of 2016.

Put options give a trader the choice to sell a natural gas contract ahead of its expiry at a prearranged strike price, which is fixed regardless of any change in value to the underlying contract.

Put options at a strike price of €13.00/MWh on the three monthly contracts of Q3 2016 have more than doubled in the course of the month, with a smaller increase seen on €11.00/MWh strikes as well. This suggests that some traders are speculating on, or hedging against, a drop in prices later in the summer.

Since 1 April, the component months of Q3 2016 have gained more than 12% in value to be assessed within a €12.888 – 13.175/MWh range on 23 May. Put options are said to be “in-the-money” when the underlying price of the contract plus the option’s premium is below the option’s strike price.

In-the-money options with the ICE bourse are exercised into futures at expiry, which means that traders can cash settle with counterparties or take delivery and buy back at the prevailing market price to turn a profit.

At the NBP, open interest lags behind the highs seen at the end of the previous winter, but is still more than double that of the TTF at 592,835 contracts.

As with TTF options, around a third of open interest lies on Q3 2016 put options, with the biggest increases in May seen on options at a 26p/th and a 29p/th strike price. The profitability of these options is dependent on the extent of any downside on Q3 2016 delivery. Q3 ‘16 was assessed by ICIS at 29.725p/th on 23 May. jake.horslen@icis.com