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NYMEX NATURAL GAS

Sell Call Option

Description:

The seller of a NYMEX natural gas option gives the buyer the right, but not the obligation, to receive the future settled NYMEX price from the seller and to pay them a negotiated fixed price. In return, the seller of the call option receives a premium from the buyer immediately. In the money call options are automatically exercised and generally settle in U.S. dollars 5 days after the settlement price on the next to last trading day (i.e., penultimate price) is established. However, both the premium and the option settlement may be deferred to match the cash flow from the physical sale of the natural gas.

Example

A natural gas producer has a contract to sell 100,000 MMBtu’s each month at the Alberta monthly index price. The producer wishes to receive an immediate cash payment of $50,000 each month for the next 12 months and in exchange is satisfied to receive no more than $1,000,000 per month plus the difference between the NYMEX and the Alberta index price (i.e., Alberta basis). As a result, they sell a call option to ATB, whereby each month they give ATB the right, but not the obligation, to receive the penultimate price of NYMEX and to pay a fixed price of $10.00/MMBtu multiplied by 100,000 MMBtu’s. In return, the producer receives a premium of $0.50/MMBtu multiplied by $100,000 MMBtu’s from ATB.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

Selling a NYMEX call option is an effective strategy when you want to receive an immediate cash payment and in exchange forgo the potential upside if NYMEX prices increase beyond a certain negotiated amount. Using the same example as above, the following table and graph illustrate the impact of a NYMEX call option hedging strategy on potential revenue for the next 12 months. In this example, we assume that the average forward price for next year for NYMEX is currently $8.75/MMBtu and ($0.75)/MMBtu for Alberta basis. In addition, we have determined based on historical volatility and the current forward curve that the 5% worst case for next year is that actual prices average $6.25/MMBtu for NYMEX and ($1.25)/MMBtu for Alberta basis; and the 5% best case is that actual prices average $12.00/MMBtu for NYMEX and ($0.50)/MMBtu for Alberta basis. In other words, there is a 90% probability that the average forward price for next year for NYMEX will be between $6.25/MMBtu and $12.00/MMBtu and between ($1.25) and ($0.50) for Alberta basis.

Impact of Hedging Strategies on Potential Revenue for the Next 12 months

Hedging Strategy	5% Worst Case Revenue	Expected Revenue	5% Best Case Revenue
No Hedges	$6M (100,000 MMBtu x $5.00 x 12mo.)	$9.6M (100,000 MMBtu x $8.00 x 12mo.)	$13.8M (100,000 MMBtu x $11.50 x 12mo.)
Hedge 100% of Volume	$7.2M (100,000 MMBtu x $5.00 x 12mo. + net option value* (100,000 MMBtu x $0.50 x 12mo.))	$9.6M (100,000 MMBtu x $8.00 x 12mo. + net option value* (100,000 MMBtu x $0 x 12mo.))	$13.2M (100,000 MMBtu x $11.50 x 12mo. + net option value* (100,000 MMBtu x $1.50 x 12mo.))

* Net option value is the original premium less the expected value of the option. The impact of the option is illustrative only.

Commonly used terms

(PDF - 472K)

To speak to our local traders directly, please contact:
	Rob Laird, Director	Rob Van Horne, Managing Director
	403-974-3582	403-974-3582
	403-815-1911	403-519-3950

	Deborah Polny, Assistant General Counsel	Rimas Siulys, Managing Director Market Risk
	780-408-7320	780-408-1960

	Derivative Settlements
	780-408-6456