Consumer Hedgers Take Advantage of Recent Lows

Oil prices moved closer to the $100 level yesterday as traders bet Hurricane Ike would skirt crude production facilities in the Gulf of Mexico. High levels of production, as much as 80%, remain shut-in resulting in approximate losses of 10 million barrels. Traders however, view this as short-term news and have chosen to focus on the market's overall bearish trend. Opec, meanwhile is expected to announce no cuts in the current quota of 29.67 million barrels per day. Instead, the cartel will most likely unceremoniously pare back production to that previously agreed upon level, as excess production of about 700,000 barrels per day has been flooding the market.

Consumer hedgers can take advantage of the current bearish sentiment to lock in 6 month lows for the remainder of 2008 and all of calendar year 2009. Using Asian options, the Sept 2008 through December 2009 $110/130 call spread can be purchased for Zero Cost by selling the $89.50 put in the same tenor. This trades provides $20,000 per month for the next 16 months of upside protection above the $110 line with downside risk beginning only below $89.50.