Futures Have No Option in Trending Higher
Feeding off strength from Wednesday's minor advance, the futures
market seemed to pick up momentum yesterday. A stronger open gained
approval from eager bulls, who bid the contract steadily upward
Thursday morning. Then after an early afternoon sell-off was
thwarted, prices again pressed higher, but this time buying came
from all market segments as locals, trade, and paper players joined
the rally. The April contract finished up 7.6 cents at $1.835.
After all the dust settled yesterday, there was still one
question unanswered. Why after prices had trended within a fairly
tight range for almost two weeks had they spiked higher amid light
physical demand and nothing ominous on the horizon? A Midcontinent
marketer was at a loss to explain the dramatic rise, offering only
that "technicals must have been at work." Another marketer was
quick to point to cash prices, which moved higher in many
locations, as a reason for the advance.
However, a Houston trader disagreed on both counts, explaining
that it was the options market that was to blame for the strength.
He pointed to a considerable number of in-the-money or almost
in-the-money calls-6,700 at $1.80 and 6,300 at $1.85-which caused
the writers of those options to step into the futures market
Thursday in order to cover their obligations. "Normally, option
writers have the luxury of playing the Access market after options
expire to cover the physical obligation of option in-the-money
calls. However because options expire [Friday] when there is no
Access trading, they will be forced to do their buying ahead of the
But how big of an impact could the outstanding calls have? "This
is a major league market mover. About 13,000 calls equates to
roughly 4.3 Bcf a day over the entire month of April," he
calculated. Looking ahead, he believes the April contract will
press higher today, before it gets "the air let out again on
Monday, and prices snap back to $1.75."
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