Geopolitical tensions continue to put upward pressure on energy markets as Feb09 WTI and Brent crude both rallied closer to the $50 level. Renewed militant attacks in Nigeria on Eni operated pipelines come as the Israeli/Gaza conflict looks set to worsen. Meanwhile, Russian and Ukraine have yet to settle their Natural Gas spat as the EU looks into possible siphoning off of gas by the latter country. Further evidence of Opec supply cuts are evident in the tightening of the Brent/Dubai EFS, now at its narrowest level in eight years. The heavy, sour crude of the Dubai Middle East contract is a superior indicator than that of Western benchmarks such as WTI or Brent in the short-term regarding any production cuts by regional producers.
Cheap, near-term upside protection still remains in the Q109 WTI $60/75 call spread strip. Trading around only $2,000 per 1000 barrels per month, this consumer strategy offers total protection of $39,000 with only $6000 at risk. The strip can even be made Costless by selling the $46 put in the same tenor. With the Q109 calendar strip trading above $52.50, the Zero-Cost strategy provides an average downside buffer of about $6.50.
Singapore, 09:00
Monday, January 5, 2009
New Year Rally keeps volatility high
Following late 2008 inventory reduction strategies and a general bearish sentiment, it is not hard to believe a correction or bounce was due. The Israeli confrontations with Hamas in Gaza were more than enough news to help the market sustain a rally. Now we are seeing plenty of upside hedges coming in, taking advantage of put skew (calls cheaper in comparison, and selling puts to finance appears a good tradeoff).
Volatility remains high by historic standards in the low 90s (%). The high level of volatility still provides a good opportunity to those who can use a 3 way strategy (selling 1 option net) to achieve low cost hedges. One such idea is to buy a call spread and sell a put such as the WTI Q1 62-72 call spread versus the $40 put for zero cost. The current swap reference for Q1 is $52. This is more of an insurance trade but accepts a $40 floor, which is near the marginal cost for many producers outside the Middle East (such as Canada).
Please call or email for current information or stratgies.
New York 415pm
Volatility remains high by historic standards in the low 90s (%). The high level of volatility still provides a good opportunity to those who can use a 3 way strategy (selling 1 option net) to achieve low cost hedges. One such idea is to buy a call spread and sell a put such as the WTI Q1 62-72 call spread versus the $40 put for zero cost. The current swap reference for Q1 is $52. This is more of an insurance trade but accepts a $40 floor, which is near the marginal cost for many producers outside the Middle East (such as Canada).
Please call or email for current information or stratgies.
New York 415pm
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