Energy markets dropped sharply again yesterday, all but erasing last week's gains. Front-month WTI crude oil sank below the $65 level while Singapore Fuel Oil 180 also gave back gains, losing almost $25 to trade below $280. Implied volatility remains firm in the paper market as hedgers have realized the benefits of buying cheap puts to protect against long swaps and even cheaper calendar call spreads to protect short physical postions.
Naphtha and gasoil prices continue to drop as well, prompting more and more hedgers to enter the market looking for inexpensive producer strategies. NYMEX will within a few weeks list Fuel Oil options contracts on their Clearport clearing system, but until that time, cheap, short-term strategies are available using highly liquid WTI options. Using Average Price Options (Asians), the WTI December 2008 $40/55 put spread is currently trading at only $2.00. That's $2,000 of total premium at risk with $13,000 of profit potential. Fuel Oil consumer hedgers looking for an entry point to buy the 180 or 380 Swaps may want to consider buying the above put spread to protect against downside losses.
Singapore, 08:00
Monday, November 3, 2008
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