Looking back over the last 20 years, we have very few periods of implied volatility to match what we have seen in the last 6 months. The two Gulf wars are the only examples that come close, and they were very short lived versus this most recent prolong volatility in petroleum markets. See graph.
The best way to combat the cost of option volatility in terms of options premium is by trading using a spread. This can be done using a collar (long put, short call or vice versa), in affect doing a volatility "neutral" trade. This can also be achieved with a put spread or call spread, to decrease risk or take a uni-directional hedge.
With the current market conditions continuing to be difficult to trade, we suggest buying put spreads to hedge inventory that is already in tank, or buying call spreads against future purchases for consumers. For Jet and Diesel consumers, the distillate crack is very well offered now, so heating oil call spreads are very attractive. A second half 2009 asian heat $1.50-$2.00/gal call spread is now worth $13 cents.
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