Yesterday saw a sharp turnaround in energy markets as traders begin to focus on the possible after-effects of the current banking/liquidity crisis. The trickle-down effect to the main-stream economy is expected by many analysts to cause several quarters of recession in the United States which may spread eastward. Early Asian trade had markets sharply higher, and several producer hedgers entered the market to purchase cheap downside protection in the form of put spreads. These mid-day Asian-hours hedges paid off swiftly as the market sold off sharply during late-day trade in NY.
Implied volatility softened early yesterday, thus allowing consumer and producer hedgers to enter the market today to lock in significantly lower premiums. As the bearish pressure looks to be unrelenting in the short-term, calendar hedges such as the Q408 through 1H09 $60/75 put spread strip are being purchased to protect against a further drop in prices. This strip is currently trading around $4.00, thus providing $11,000 of downside protection per month after the $4,000 average cost is factored in. To gain the full $15,000 per month of protection, bearish hedgers can make the trade zero-cost by selling the $96 call in the same tenor. This hedge offers no premium at risk below the $96 level.
Singapore, 07:40
Tuesday, October 14, 2008
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