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Shift to Natural Gas Could Boost This Stock

Shift to Natural Gas Could Boost This Stock

In a report published by The New York Times recently, the paper noted,

“Overall, fossil fuels still dominate electricity generation in the United States. But the shift from coal to natural gas has helped to lower carbon dioxide emissions and other pollution. Last year, coal was the main source of electricity generation for 18 states, down from 32 states in 2001.”

How the United States generated electricity from 2001-2017

Source: NYTimes.com

However, the paper noted more work will be needed to reduce carbon emissions,

“But experts warn that a shift to natural gas alone won’t be enough to curb emissions and avoid dangerous global warming.”

“Switching from coal to gas is a fine thing to do in the short run, but it’s not a solution in the longer run,” said Severin Borenstein, Director of the Energy Institute at the University of California, Berkeley’s Haas School of Business.

“Gas still produces a lot of greenhouse gases. We can’t stay on gas and solve this problem. Ultimately we’re going to have to go to much lower or zero-carbon sources.”

While the long term goal is to reduce natural gas use, that may be challenging to do in the short run. That could benefit natural gas companies.

A Bullish Trade in Nat Gas

This recent CNBC report highlights a potential trading opportunity,

Tellurian Inc’s (Nasdaq: TELL) proposed Driftwood liquefied natural gas (LNG) project in Louisiana took a major step forward on Friday as the U.S. federal energy regulator issued a final environmental report clearing the way for the company to seek a permit to build the export terminal.

The company said it now needs an order from the Federal Energy Regulatory Commission (FERC) allowing the construction and operation of the 27.6 million tons per annum (mtpa) liquefaction plant aimed at meeting growing global demand for the supercooled fuel.

“Tellurian will then stand ready to make a final investment decision and begin construction in the first half of 2019, with the first LNG expected in 2023, said Tellurian Chief Executive Meg Gentle in an statement.

In the report, known as a final environmental impact statement, FERC staff concluded that the Driftwood LNG project “would result in adverse impacts on the environment; however, impacts on the environment would be reduced to less than significant levels” with avoidance and mitigation measures.

Driftwood is one of dozens liquefaction/export projects under development in the United States seeking customers so they can start construction and enter service over the next decade to meet growing global demand for the fuel.

U.S. LNG exports have quadrupled in the last two years and are expected to top 10.3 billion cubic feet per day (bcfd) by the end of 2020, making the country one of the world’s largest LNG exporters. One bcf of gas is enough to fuel about 5 million U.S. homes for a day.

In addition to the LNG terminal, Tellurian is developing pipelines to transport gas from shale formations in Texas and Louisiana to LNG terminals and other Gulf Coast customers.

This news seems to have boosted the stock in the short run.

TELL daily chart

And, the up-tick could mark a longer-term bottom in the stock.

TELL weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying TELL could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for TELL

Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For TELL, the April 18 options allow a trader to gain exposure to the stock.

An April 18 $10 call option can be bought for about $0.85 and the April 18 $12.50 call could be sold for about $0.50. This trade would cost $0.35 to open, or $35 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $35.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in TELL the maximum gain is $2.15 ($12.50 – $10 = $2.50; $2.50 – $0.35 = $2.15). This represents $215 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $35 to open this trade.

That is a potential gain of about 514% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

For more information on options click here for our free guide, The Ultimate Guide to Options Trading.