I was in the same situation once, only opposite in the end I just got neutral with straight long cl contracts (in your case short) I wasn't trading at the time, I had a businesss to run, so making money off the hedge was not a priority sometimes the hedge is more psychological I figured out how much crude I was using each month and kept that much on long in futures the cost was in commissions spread and carry where it goes wrong is when a guy starts trying to figure out how to make a profit on a life insurance policy as a former commodity broker I've seen it happen many times
Atti I think you're over complicating things a bit and exposing the guy to large potential margin calls w/ the fences. From what it sounds like, a simple put strategy of monthly or quarterly puts out 9-12 months should suffice and be cost effective. No risk of margin call. Known loss limit.
My point is that I would want to invest 90% of my assets in a portfolio that is going to make a positive return regardless of where crude goes. Then with 10%, of his monthly net cashflow, he can buy insurance for a huge decline in crude. I certainly wouldn't want to spend dollar for dollar hedging a price level that we may never see again. As I see it, he's
This is a question of hedging a unique, identifiable risk, not managing a portfolio of assets. The two are wholly different.
He's entangled in a crude/products business in some way. Perhaps he's done a land-lease deal, he's not saying. You don't go about protecting your revenue by investing in unrelated investments. Who stated dollar for dollar? He simply needs to solve for a hedge he's willing to live with. ~12% prob of touching $65 by Mar14. Take something exceeding that (% of upside revs) and buy those puts at $1.00. $100k nets him at least $400k at $60. It's path-dep and retains the possibility of taking the gains and potential for a reversal.
I would argue that growing his entire portfolio is the #1 goal and hedging fits well within that. He can accomplish some of that hedging, simply by his asset allocation. I would argue that someone holding say 20% of their assets in gold is hedging, even though they aren't using a complicated options strategy or futures to do so.
Jesus man, he has no portfolio if CL plummets. htf is a gold hedge going to help? How did gold do when crude plummeted in 2008?
I was using gold as an example of a hedge through asset allocation, not that he needs to hold 20% gold. That post wasn't even in response to you it was to ogarbitrage. Also, maybe I missed something but how do you know he loses his entire portfolio is wiped away by a crude decline? He very well might be some sort of support contractor that won't have any work to do if exploration declines.