Option Premiums Cheapen

Front month crude oil dropped below $106 in Asian markets yesterday as traders moved beyond the short-term impact of Gulf of Mexico hurricanes. Compared to dire expectations, Gustav looks to have been a nonevent, although further assessment of production facilities is required before this pronouncement can be fully digested by the market. Energy markets appear to be looking for the level that restrains demand growth but does no destroy it and traders are now focusing on a lack of demand going forward due to what looks like a global economic slowdown. On the flipside, energy investor Boone Pickens said yesterday on CNBC that he sees Opec cutting production shortly in order to defend the $100 price level.

Option premiums have decreased significantly in the past 24 hours and consumer hedges have become much more affordable as a result. Zero cost upside protection from the $115 level to the $130 line can be owned from today until the end of calendar year 2008 by selling the $101 put in the same tenour. This trade locks in oil prices at $115 should the market move above that level and provides $15,000 of protection with no premium at risk at or above a price of $101.