how to hedge against oil price collapse?

Discussion in 'Commodity Futures' started by toben, Mar 5, 2013.

  1. toben



    I have a support by business for tight oil plays. If the cost of oil falls below $60 my work will slow considerably. If it falls beneath $50 I am out of business. Can anyone direct me to an easy way to hedge against this? Would I just buy puts against crude? Sorry for the noob question. Thanks in advance for the help!
  2. Yes, puts will help but they can be costly.
  3. toben


    Can someone show me a good cost effective hedge against a crude oil price collapse 1 year out?
  4. Do you want to hedge only 1 year out or each month for the next 12 months?

    What is the "size" of your exposure? 1 futures option contract is for 1,000 barrels. How much will be needed to offset your potential losses if crude goes to $50?

    Feel free to PM.
  5. ofthomas


    like ogarbitrage said, you need to determine your exposure first... and then just go out on the curve a year out and purchase puts or just buy the contract and hold the appropriate size based on your exposure... keep in mind all that will do is basically hedge you... so you will remain "neutral".. but you still have dollar risk, so if i was you I would get a calendar a year out, that would then truly reflect the crude risk... IMO, buying the contract to hedge your risk will be less costlier than doing the options... that far out might not have a market for options, but I could be totally wrong... so far from the CME site Jun/Dec 2014 have volume on the futures side..

    then again, I dont trade energy, so take what I say with a grain of salt... :)
  6. newwurldmn


    it depends on your sensitivity to oil on the upside.
  7. I have a friend who's a caterer and restaurateur who commutes from LT to Reno with a small fleet spending ~$6k a month on diesel. They buy even money risk-reversals with deferred strangle buys to reduce the req.

    There are a ton of liquid hedges in CL and products.

    You're at an advantage as CL is skewed up and out; the premium on vol is on the higher strikes. You could simply sell OTM calls to finance the OTM put buys. It's algebra to arrive at the allocation.
  8. Calendar meaning delta1? The switch-risk in futs can exceed the delta of the outright.
  9. I would roll quarterly as the vol is in the front months. I would want to be revenue positive (credits).
  10. I think he meant a calendar strip, as in a one-year term.
    #10     Mar 5, 2013