Energy markets began yesterday by following equities higher but the rally proved to be short-lived as demand fears outweighed positive investor sentiment. The pessimistic near-term outlook of 6-12 months for crude demand reflects widespread fears of a worldwide economic recession, further compressing already weak demand. Yesterday's move higher resulted in implied volatility staying at already inflated levels.
December WTI crude managed to push back above $65 in early Asian trading, presenting many bargain opportunities for downside hedgers. Using Average Price Options, the December 2008 $40/60 put spread is currently trading around $3.75. That's $3,750 of total premium at risk to short crude oil from $65. Any move lower in the next few days would produce quick profits for this protection strategy, while holding it until expiration at the end of December could see a maximum profit of $16,250 with only $3,750 at risk. The strategy can be combined with the sale of the December $78 call to make the entire structure Zero Cost.
Singapore, 08:30
Tuesday, October 28, 2008
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