Crude oil consolidated above $105 in late-day trading Friday as commodity markets remain buoyed by fear of a failure to pass the US Treasury's bail-out plan. As several weeks of extremely volatile trading looks set to continue, option premiums remain at increased levels. Recently, both consumer and producer hedgers have looked to the option markets as a way of protecting their fuel inventories or future purchases as the swaps markets have become too dangerous to navigate. Spreads can be purchased on the cheap to provide both upside and downside protection with very little or no premium at risk.
An example of such a producer hedge strategy can be found using Asian options in WTI crude oil. The Q4 $100/85 put spread strip can be owned for only about $3.10. That represents $3,100 of total premium at risk per month with $11,900 per month of downside protection. Again, if the market reverses and moves higher, the max loss on the hedge is only $3,100 per month. The protection can be made costless by selling the Q4 $118 call. This zero premium strategy provides about $12 of room on the upside before the short call becomes active.
Singapore, 23:17
Sunday, September 28, 2008
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