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Futures Have No Option in Trending Higher

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 close."

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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