Nat Gas Producers have rolled in the last few days, trading alongside AI names disrupted by the US-China escalation over rare earths. 22V’s base case is a de-escalation, albeit on a bumpy path (HERE). The Strategy team expects AI to resume leadership in 22V’s base case of a de-escalation longer-term, and as Colin Fenton, 22V commodities expert, notes (HERE), nat gas producers are a way to position for powering AI. The recent pullback, and outlook for short-term volatility, makes now a good time to consider adding exposure via options trades.
FYI, the Quant team ran an NLP tool to filter for nat gas producers who have mentioned AI as a tailwind in earnings transcripts and presentations. All of them have. Their broader strategy of going long Energy names who have mentioned AI as a tailwind and short the names who haven’t mentioned AI at all has tracked nat gas prices, a confirmation of the influence of the AI theme on the trade.
Looking at John Roque’s technical scoring for names in the group, we have identified two names on his favorites list (EQT and RRC) we suggest adding low-cost/longer-dated option structures in to position for further upside over the next six months. In addition, since both of these names moved up nicely from their recent lows, and recently pulled back, both of these ideas will allow for a sizeable cushion in case we see another decline like the one we saw between July and Sept (not our base case).
Trade #1 – EQT March upside
Sell EQT March 45 put
Buy EQT March 55/70 call spread
Costs ~ $2.40 (EQT 53.50 ref)
Trade Details:
- Selling the 12% out of the money puts (at a level which was also the April lows) to buy the upside call spread that starts 3% above spot
- March expiry allows nearly 6 months for bullish thesis to play out (also captures the next two earnings)
- Structure can be added to an existing long (bullish) equity position, or as an entry-point trade into the name (with a nice downside cushion) following recent pullback
- Please contact me or the 22V sales team for updated pricing and execution capabilities
EQT – we continue to favor selling the 45 strike put (April lows) to own upside call spreads when stock pulls back (like it did this past week)
Trade #2 – RRC March upside
Sell RRC March 32 puts
Buy RRC March 40/50 call spread
Costs ~ .30 (RRC 36.25 ref)
Trade Details:
- Selling the 12% downside puts (at a level that was basically the lows in August) to buy the upside call spread that starts ~ 10% higher (RRC was at 40 a week ago)
- March expiration will capture the next 2 earnings reports
- Structure can be added to an existing long (bullish) equity position, or as an entry-point trade into the name (with a nice downside cushion)
- Please contact me or the 22V sales team for updated pricing and execution capabilities
RRC – like EQT we suggest using a known support level as part of an upside risk-reversal call spread trade (32 strike put in this case) when stock has pulled back
