Call Options Or Put Options On Cheniere Energy (LNG)?

| March 7, 2014 | 0 Comments

LNG OptionsCheniere Energy (LNG) is off to a good start in 2014, up 23% year-to-date.  The company is a big player in the liquefied natural gas business.

Currently, LNG shares are sitting at $51.92.  The stock’s up 134% from the 52-week low of $22.17 and is just 6% below the 52-week high of $55.34. 

Is this an opportunity to buy call options on LNG because of the upside potential if the US begins exporting more natural gas?  Or should you buy put options on LNG because natural gas prices are already in decline?

The bulls make a convincing argument…

The situation in the Ukraine is causing concern over natural gas supplies.  About half of the pipelines between Russia and Europe pass through the Ukraine, and count for 15% of Europe’s total gas supply.  A disruption in those pipelines could seriously impact natural gas prices in Europe and elsewhere.

In response, the US is considering exporting more natural gas overseas.  As the largest producer of natural gas in the world, the country has more than enough to spare.

LNG is one of the largest players in the liquefied natural gas business.  Since natural gas has to be liquefied in order to be exported, the company could be a significant beneficiary if exports grow.  Upside potential for LNG in this case is through the roof.

But the bears have a compelling case as well… 

LNG may benefit from an increase in natural gas exports, but the price of natural gas has already reversed.  If natural gas prices remain lower, it will hurt the company’s profits.

In the last couple weeks, the unit price of natural gas has dropped from over $6 to the high $4 range.  The spike in price was originally due to the arctic weather the US has been experiencing.  However, now that warmer temperatures are in sight, natural gas prices have returned to their normal range.

LNG’s exports would have to ramp up a substantial amount in order to make up for the considerably lower prices.  Investors seem to be overly enthusiastic about this happening, considering the government many not even go that route.

So is LNG’s potential for greater exports a reason to go bullish on the stock, or are lower natural gas prices a reason to be bearish?

If you think the bulls are right, take a look at buying the LNG April $55 calls for around $1.75.

If you think the bears are right, take a look at buying the LNG April $49 puts for around $1.50.

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.