Volatility Hedging Strategies for Sing FO 180

Despite a run-up in equities, energy markets tumbled from recent highs yesterday. API stock figures came out with builds lower than those predicted for WTI and Gasoline, while the protracted and bitter winter in the US Northeast continues to be a lone source of refined products demand, resulting in a draw of 350,000 barrels. Support for WTI is once again around the $40 level- more than $2.00 below the current trading price- reinforcing the strategy of buying puts to protect long swap hedges in the currently volatile markets.

With the Sing Fuel Oil 180 2009 calendar swap now trading well over $260, an example of cheap downside protection against long swap positions can be found in hedges such as the Feb-Aug ’09 $230 put strip, currently offered around $26. The option does not need to be held until expiration to show a profit, a sharp move lower may show profits which can then be unwound against losses in a long swap position.

Similarly, Sing Fuel Oil 180 consumers can find upside protection in a hedge that pays cash as a result of a lack of downward movement with unlimited upside. The trade currently being quoted is a 12 month calendar strip from Feb ’09 through Jan ’10 (it can be adjusted to contain any calendar tenor required). For every 5,000MT, the trade pays out an average of $400,000 per month at or above the current calendar swap price of about $270. Below $270, the payout begins to decrease until it reaches Zero at $212.50. Below this point, the trade incurs losses. Given the current relatively high level of volatility, this hedge allows the consumer to collect large amounts of premium while taking advantage of the relatively low calendar swap price (losses not incurred until below an average calendar swap price of $212.50). With implied volatility in Calendar 2009 approximately around 73%, the lower level price barrier of $212.50 represents a 4.5 standard deviation move.

Singapore, 09:00