Energy prices rose yesterday as Hurricane Gustav moved closer to the oil and gas producing region of the Gulf of Mexico. While landfall is not expected until Monday, the approaching weekend has pushed many market participants to either go long or at least square-up any short speculative positions. This has resulted in the steady march back up towards $120 and a strengthening in crude oil option premiums. Not only upside call buying has been prevelant, but the market has seen traders scoop up cheap downside protection in the bet that Gustav will be a nonevent, resulting in a large downward move next week.
Cheap short-term downside protection is still available in the Q4 $110/100 put spread strip. For only $2,500 of total exposure per month, this trade provides protection of $7,500 per month on the event of a sharp move lower- just such a move which traders are looking for if Gustav fails to move in the direction of oil production facilities.
Wednesday, August 27, 2008
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