Traders yesterday turned their focus to announcements from Saudi Arabia, the world's largest oil producer, that the country would begin cutting production and exports to customers in the US and Europe. Opec is desperate to put a floor in the volatile and declining oil price, hence the large cut, to the tune of about 5%. However, the price jump is seen by many as an opportunity to lock in higher prices as the market continues to trend towards $50. The underlying trend lower is supported by weak demand fundamentals in the current economic turmoil.
The $7 rally in WTI crude yesterday highlights the need for hedging strategies with limited loss potential- the market is too volatile to simply enter the market by selling or buying swaps. Cheap option strategies are available which provide unlimited gains with only limited loss potential. Using Average Price Options, the December $55/70 put spread is currently trading around $5.00. That's $5,000 of maximum loss potential (yesterday's rally would have resulted in more than $7,000 of losses by selling swaps) with a potential payout of $10,000. For unlimited downside protection, producer hedgers can buy the December $60 put for only about $2.80. That's $2,800 of maximum loss potential against unlimited gains should crude oil continue lower in the current economic turmoil.
Singapore, 08:00
Tuesday, November 4, 2008
Monday, November 3, 2008
Cheap Protection Strategies
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
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
Sunday, November 2, 2008
Volatile October Comes to a Close
Trading in the volatile month of October came to a close on Friday as new evidence continues to emerge pointing to recessionary conditions in many western nations. The Bank of Japan followed the lead of central banks around the world with its own 20 basis point cut in the borrowing rate, reducing that country's overnight rate to only 0.3%. WTI crude oil continued to pull back from the $70 level as the continuing economic turmoil leads many traders to position themselves for further moves lower in what remains of calendar year 2008.
Producer hedgers continue to look for cheap downside strategies. Using Average Price Options (Asians), the WTI December 2008 $60 puts are trading around only $3.25. That's $3,250 of total premium at risk to be short from the $60 level for the next 60 days. This simple strategy allows unlimited downside protection without the margin calls and volatile daily swings of trading flat price. The long put can be made costless (meaning the hedger need only post margin) by selling the December $80 call. This trade puts zero premium at risk at or below $80.
Singapore, 12:47
Producer hedgers continue to look for cheap downside strategies. Using Average Price Options (Asians), the WTI December 2008 $60 puts are trading around only $3.25. That's $3,250 of total premium at risk to be short from the $60 level for the next 60 days. This simple strategy allows unlimited downside protection without the margin calls and volatile daily swings of trading flat price. The long put can be made costless (meaning the hedger need only post margin) by selling the December $80 call. This trade puts zero premium at risk at or below $80.
Singapore, 12:47
Thursday, October 30, 2008
Rally Proves Short-lived
WTI crude oil fell back yesterday in a much-expected retreat from the $70 level as producer cuts and consumer demand destruction rightfully returned to traders' focus. Medium-term market fundamentals point to slower growth in the global economy, reinforcing the recent bearish pressure on energy markets. The 2-day rally in both equity and commodity markets sparked by the highly anticipated US Fed's 0.5% rate cut was of course short-lived.
Implied volatility remains elevated but downside bargains still exist in the form of cheap put spreads and zero-cost 3-ways. Using Average Price Options (Asians), the WTI December 2008 $50/60 put spread is currently trading around $2.50. That's only $2,500 of maximum risk per 1000bbls of crude oil with a potential payout of $7,500. The potential payout can be raised to $10,000 by selling the December $82 call. This 3-way has zero premium at risk at or below $82 and would provide substantial downside protection if crude were to test the $60 level in the next few weeks.
Singapore, 08:50
Implied volatility remains elevated but downside bargains still exist in the form of cheap put spreads and zero-cost 3-ways. Using Average Price Options (Asians), the WTI December 2008 $50/60 put spread is currently trading around $2.50. That's only $2,500 of maximum risk per 1000bbls of crude oil with a potential payout of $7,500. The potential payout can be raised to $10,000 by selling the December $82 call. This 3-way has zero premium at risk at or below $82 and would provide substantial downside protection if crude were to test the $60 level in the next few weeks.
Singapore, 08:50
Wednesday, October 29, 2008
CME/NYMEX Adds Gasoil, Fuel Oil & JetKero Options to its List of Cleared Products
*** CME/NYMEX will be launching Gasoil options (Asian, American & European style) on Clearport this weekend. Hudson Capital Energy will be making markets and providing liquidity and hedging strategies on these options 24hours/day with our offices in Singapore and NY shortly. Fuel Oil and JetKero options will also follow within a few weeks.
Commodity and equity markets reacted swiftly yesterday to the US Federal Reserve lowering interest rates half a point to 1%. However, the sharp move higher may soon prove fleeting as the move by the Fed is seen as largely symbolic and will have little to no effect on the global economic slowdown and the resulting drop in demand for raw materials. WTI crude oil pushed towards $70 before backing off to below $68.
Implied volatility softened in early trading yesterday, allowing downside producer hedgers several compelling reasons to re-enter the market. As the crude price rallies, long put strategies will of course become cheaper. Second, with implied volatility softening, option premiums will decrease even further. In early Asian trading this morning, the WTI December 2008 $65/45 put spread was offered at $4.25. The put spread was also quoted against the December $90 calls. This 3-way enables the downside or bearish hedger to purchase the $65/45 put spread and sell the $90 call while only putting $2.00 of premium at risk. That's a maximum loss of only $2,000 should crude oil stay below $90 and above $65 in December. Max gain on the trade would be $18,000 per contract.
Singapore, 08:30
Commodity and equity markets reacted swiftly yesterday to the US Federal Reserve lowering interest rates half a point to 1%. However, the sharp move higher may soon prove fleeting as the move by the Fed is seen as largely symbolic and will have little to no effect on the global economic slowdown and the resulting drop in demand for raw materials. WTI crude oil pushed towards $70 before backing off to below $68.
Implied volatility softened in early trading yesterday, allowing downside producer hedgers several compelling reasons to re-enter the market. As the crude price rallies, long put strategies will of course become cheaper. Second, with implied volatility softening, option premiums will decrease even further. In early Asian trading this morning, the WTI December 2008 $65/45 put spread was offered at $4.25. The put spread was also quoted against the December $90 calls. This 3-way enables the downside or bearish hedger to purchase the $65/45 put spread and sell the $90 call while only putting $2.00 of premium at risk. That's a maximum loss of only $2,000 should crude oil stay below $90 and above $65 in December. Max gain on the trade would be $18,000 per contract.
Singapore, 08:30
Expected Fed rate cut and bullish stats
A solid rally in all energy products followed the Wednesday stats, which were slightly more bullish than expected. The market also is digesting the likelihood of OPEC taking more aggressive action in the near future. We know that we have cracked some higher cost producers threshold levels, which indicates some supply tightening in addition to OPEC. That said, some fresh data is pointing to lower demand which has led the market over the last few weeks. Volatility in crude oil has come in sharply with this rally, providing an opportunity to buy puts for those who remain bearish near-term. The Dec American $60 Put was offered $2.10/bbl, providing reasonable insurance for the next month. The costless crude collar was offered with the $60 put financed by the $76 call.
Consumers have been aggressively looking to hedge consumption for 2009 and also 2010. The call spread strategy remains attractive as volatility has yet to subside. The Fed rate cut was expected and the US equity markets appeared equally uncertain on the close.
New York, 5pm EST
Consumers have been aggressively looking to hedge consumption for 2009 and also 2010. The call spread strategy remains attractive as volatility has yet to subside. The Fed rate cut was expected and the US equity markets appeared equally uncertain on the close.
New York, 5pm EST
Tuesday, October 28, 2008
Crude Rally Presents Producer Hedge Opportunities
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
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
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