Market Jitters Result in Flight to Commodities

Energy markets rallied yesterday on the back of a flight to commodities from equities. Risky assets, at the moment being anything that is not gold or energy related suffered enormous losses in volatile trading. Weekly US inventory numbers drove crude prices sharply higher as the effects of Huricane's Gustav and Ike are now being quantified. Although draws were largely expected, crude stocks suffered an outsized dip for the second week in a row, down 6.3m million barrels, a reflection of the sharp weekly drop in imports.

Option premiums remain elevated as a result of the sharp market moves. Consumer call spreads will always be a cheap way to gain upside protection, especially in volatile markets. Using Asian options, the WTI Q4 $100/110 call spread can be purchased for an average price per month of about $2.80, or $2,800 of total premium at risk. This call spread can be purchased for zero cost with the sale of the Q4 $88 put.

Singapore, 08:00

Financial institution instability

Despite a US Fed bail-out of AIG, investment banks such as Morgan Stanley and Goldman Sachs felt the pressure today selling off as much as 40%. Energy prices rebounded as inventory data showed draws in crude, with more expected for next weeks reports. Traders reacted slowly but finally pushed prices higher based on the ongoing Nigerian conflict and short covering from recent sell-offs. Gold rallied sharply also as markets sought quality assets. Volatility remains high as we face one of the most trying financial markets (including commodities) on record. We must stress here that the NYMEX and ICE clearing models used by HCEnergy remain the most sound platforms for credit. OTC/ISDA contracts with companies such as Morgan Stanley could be at risk. We expect more derivative contract flow to move to NYMEX/CME and other cleared exchanges.

During these times of volatility, owning options is the best strategy versus trading futures.