Options Corner: Cheniere Energy Hides In Plain Sight Despite Escalating Middle East Conflict

Curiously, liquefied natural gas specialist Cheniere Energy Inc LNG represents one of the hydrocarbon-focused investments that really hasn't moved much since the recent escalation of tensions in the Middle East. That may be due to the focus on crude oil. However, gas shipments may also be impacted by the conflict, which may provide a cynical boost for LNG stock.

At the heart of the energy discourse is Israel's military operation against Iran, which occurred last week. Israeli forces continue to strike critical infrastructure in Tehran and other Iranian regions, raising fears of major retaliatory measures. For the energy industry, the greatest concern is a potential restriction of the Strait of Hormuz. While Iran doesn't outright have complete control of the waterway, the government asserts that it can shut it down.

Mostly, the headlines have centered on the strait's impact on crude oil. According to the U.S. Energy Information Administration (EIA), more than one-quarter of total global seaborne oil trade flowed through the passage last year and during the first quarter of this year. However, the EIA also notes that around one-fifth of global LNG trade also transited the Strait of Hormuz. Fundamentally, then, the potential for disruption could lift LNG stock.

On the technical front, it's possible that the equity may be charting what market analysts may refer to as a bullish pennant formation. From a visual observation, LNG stock spiked in late May through early June. Since then, the security has printed a series of lower highs. On the other end of the vertical scale, there appears to be a series of higher lows.

Presumably, as the theory goes, the top and bottom trend lines converge toward an apex point. At this pinnacle, there's a "good chance" that LNG stock could break out.

Using Statistical Analysis To Narrow Down A Forecast For LNG Stock

While the fundamental and technical frameworks are compelling, they also don't provide much specificity. For example, the pennant formation mentioned above may indeed have a decent shot at swinging higher. However, the financial publication industry often takes for granted probabilistic language without requiring empirical justification.

A major dilemma regarding the technical approach in particular is the lack of falsifiability. What may be a pennant to one person could be a wedge to another person. It's a subjective methodology, which by nature is fragile and unreliable over the long run. Turning to quantitative technical indicators like the MACD or RSI is also problematic due to the non-stationarity problem: share prices generally fluctuate — often wildly — over time.

To implement meaningful statistical analysis, one must apply conditional probabilities; that is, calculate the odds of a particular outcome across a subset of the underlying data. This is equivalent to baseball's situational batting average, such as when there are runners in scoring position (RISP), as opposed to the batting average across the entire season. One gives the trader actionable insights while the other is akin to a factoid.

Nevertheless, to implement conditional probabilities requires that the core measurement metric speak a unified language. To accomplish this, it's possible to convert historical price data into market breadth — sequences of accumulative and distributive sessions. Market breadth is a representation of demand and demand is a binary construction: it's either happening or it's not. As such, it's a metric that can be categorized and quantified for probabilistic analysis.

Currently, LNG stock is on course to print a "6-4-U" sequence: six up weeks, four down weeks, with a net positive trajectory across the 10-week period. Generally speaking, LNG tends to perform better when the balance of accumulative sessions outweighs distributive sessions over 10-week intervals.

Regarding the specific sequence above, in 55.77% of cases, the following week's price action results in upside, with a median return of 2.8%. Should the bulls maintain control of the market over the next two weeks, LNG stock may have enough fuel (based on past historical trends) to eclipse the $245 level.

Laying the Foundation For A Tempting Trade

For aggressive traders, one tempting idea to consider is the 240/245 bull call spread expiring July 11. This transaction involves buying the $240 call and simultaneously selling the $245 call, for a net debit paid of $200 (the most that can be lost in the trade). Should LNG stock rise through the short strike price ($245) at expiration, the maximum reward is $300, a 150% payout.

Primarily, this trade stands out due to the implied shift in sentiment regime. As a baseline, the chance that LNG stock may rise over any given week is only 50.82%. What the 6-4-U sequence is demonstrating is a favorable matchup or a potential mispricing in the options market. For those who are already prone to risk-taking, there is an incentive to swing the bat.

Also, using data from historical performance metrics when the 6-4-U has flashed, there is theoretically enough gas to drive LNG stock just above the short strike price in two weeks' time. This trade provides an extra week for the thesis to pan out, along with the inherent option to exit the spread early (at the cost of any remaining time value).

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