Energy markets traded through another volatile session yesterday as traders alternated focus between a financial meltdown (likely resulting in further demand destruction), a weakening dollar (inflation flows causing oil prices to rally), and lastly, crude inventory data showing stalled production in the Gulf of Mexico. Volatility exploded yesterday as market players attempted to either pare short option positions, or increase longs, resulting in further increases in premium.
As it is, option strategies remain the safest play in the current environment, allowing the prudent hedger or trader limited downside paired with unlimited profit potential. Consumer hedgers looking for short-term upside protection as another uncertain weekend approaches can look to the WTI November $100/115 call spread using American-style options. Trading around $3.50, this spread provides $15 of upside protection with a max loss potential of only $3,500.
Singapore Fuel Oil hedgers looking to protect their upside can combine the above strategy with the purchase of 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $19.32.
Singapore, 08:35
Thursday, September 18, 2008
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