Thanks for the input. How about this question. If oil drops to $60 a barrel I will lose @ $250K. If it drops to $50 a barrel, I lose @ $500K. If it stays high or goes up only good things happen. Can someone help design a hedge for me in this scenario? The amount of money I want to invest will be as little as possible and still protect me against a huge price collapse.
Can you define 'lose". Are we talking opportunity cost or hard cash? Do you lose (whatever that means in this context) 100K or so at $70? Might you want to bite the bullet down to $60 but be covered below that? This puzzle gets pretty simple once you define what makes you comfortable. It is easy to waste money and/or tie up a bunch of margin $$ if you skimp on the upfront thinking. The math will become pretty obvious once you think through deliverable you want.
Who wouldn't like to allocate as little as possible? So you're unimodal to price, period. You have a floor with no cap. It's really a simple scenario to price. All you need to define is how much you're willing to risk on the upside (hedge loss). You speaking in binary-terms and have offered no color on duration (beyond the year). Do you need to hedge more discretely (inside a year)? IOW, what happens if price trades to $60 mid-year but closes above $70 at 1Y out? I would suggest some sort of long put backspread at the 70/80 strikes; going out on duration only as far as you need to produce an initial credit. Selling 1x80P Buying 2x70P Rolling each Q. You can simply sell futures outright. Solve for how much income you're willing to hedge. Or sell a call/buy a put to effect a risk-reversal and you collar your exposure. Under your current condition (lowest cap allocation) you're stuck with the backspread.
Ok, I'm a total Noob when it comes to creative hedging ala atticus and probably others here, but I know a lot about asset allocation and if I'm you, here's what I would do..... I would allocate my investable portfolio, along with any new monies that you are receiving during the oil boom you're experiencing the following way: 10%- VISVX (Vanguard's Small Cap Value mutual fund). This has the purpose of capturing gains during a prosperous stock market such as we have had for the last 4 years. 10%- Physical Gold (or possibly an ETF such as GLD, or SGOL). This has the purpose of hedging for hyper-inflation or a currency debasement but of course you already have a lot of inflation hedge already built into your business. This will do well during a negative real interest rate environment. 35%- PTTRX (Pimco's Total Return bond fund). Purpose of providing a reasonably stable, defensive allocation, yet still gives you a decent return. Look at a chart of this fund 35%- BTTRX (American Century Zero Coupon Treasury fund) Great for extreme deflation, or market crash, which is likely to happen if crude plummets. The remaining 10% of new monies you have to invest each month, could be used to hedge crude outright with cheap puts that would provide a big return if you experience a huge price decline. If we get into some serious inflation (meaning you're making a killing from your business, then I would definitely re-allocate some money into very short term bonds or TIP's in case the Fed is forced to raise rates, in which case most things will do poorly except for cash and cash equivalent, but I' don't see much likelihood of that happening any time soon (ala Volcker in the early 80's).
I would short CL. Start small number of contracts. Roll over each month. If CL crashes, you will make more than $ 250,000.
When you roll over, you will book your current profit or loss. Keep as small as possible as insurance.
So many issues. Great that op will make money when oil rallies. How much? Is his beta to oil different on the upside and downside? My company has a beta to oil, as it's a feedstock to our major input, but I can pass most of these costs to my customers and when oil goes down no one gets a price reduction. So I don't hedge. However as there are many steps in the middle between crude and me, I may not get a benefit as crude drops. When hedging, what you are hedging matters a lot. And there's not enough information. Clearly this is a business so you need to guarantee some kind of profit in all scenarios. Does your business allow it with the hedge? Or are you protecting bankruptcy risk? How certain are you about your sensitivity to oil? What is your business that you are imPlicitly long oil?