Fuel Hedging using CL Call Options

A comparison of two price-risk management approaches:

An example of conventional wisdom for hedging:
http://www.elitetrader.com/vb/showthread.php?s=&postid=3326722#post3326722

Quote from ogarbitrage:

Hedge when you can, not when you have to.
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A proposed strategy for hedging in this thread:
http://www.elitetrader.com/vb/showthread.php?threadid=233099

Quote from OddTrader:

Hedge when you have to!
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i.e. Always hedged with options.

Q
"A smart strategy seeks to avoid catastrophic risk at all times, to profit by real or implied volatility explosions, and to limit time decay loss." --- Baird
UQ
 
Quote from ogarbitrage:

Zero cost collars should be synonymous w/ "margin calls".
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To clarify a perhaps misconception:

A better and accurate statement would have been "Trading Fences (whether zero cost or not) alone should be synonymous with Margin Calls".

Trading Collars (consisting of both Fences and the Underlyings altogether within the same trading account as an integration) would be relatively safe. Hedging with collars is to be discussed.

Separating the (explicit or implicit) Fences from the Underlyings with two different accounts (whether knowingly or unknowingly) would be problematic!

http://www.elitetrader.com/vb/showthread.php?s=&postid=3326722&highlight=collar*#post3326722

Quote from ogarbitrage:

A collar/fence in your case would consist of purchasing a put and simultaneously selling a call to finance the purchase of the put. This is typically done at costless, however I advice against costless fences, or fences of any nature from a hedging perspective. By selling the call you are not afforded any upside gains should prices rally. You are also subject to margin calls if prices rally, despite having a cash position - if cash flow is a potential problem, stay well clear of fences.
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"MINDSETS and BIASES

All analysis that includes subjective elements is vulnerable to Mindsets and Cognitive biases.

A mindset is a mental framework of rules, heuristics, beliefs, and experiences used by an individual to filter, organize, value, and interpret data that might be used to assess a risk or come to conclusion.

Mindsets are essentially mental shortcuts that often speed understanding. However, they may fail the analyst when experience is not a reliable guide or when aspects of the analysis are outside the analyst's area of expertise.

...

Historical experience alone may be of little use here, as enemies and competitors continue to change and refine their tactics, and the quality of results often depends on the creativity of subject matter experts."

--- Extreme Risk Management - Revolutionary Approaches to Evaluating and Measuring Risk (2010, by Chritina Ray, Page 98)

http://www.amazon.com/Extreme-Risk-Management-Revolutionary-Approaches/dp/0071700595

http://www.saffrontech.com/2011/11/...ght-about-extreme-risks-in-financial-markets/

http://readingthemarkets.blogspot.com/2010/07/ray-extreme-risk-management.html
 
Confused:

http://www.elitetrader.com/vb/showthread.php?s=&postid=3132828#post3132828
Quote from ogarbitrage:
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Quote from DeeDeeTwo:
Are CL and LO options one and the same?
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CL options (product code LC) are European if I remember correctly and typically traded electronically. American (LO) and Asian (AO) options are typically traded OTC via voice brokers or on the floor.

To move size, participants still need to go to the floor.
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What is LC?

Q
http://www.cmegroup.com/trading/agricultural/livestock/live-cattle_contract_specifications.html

LIVE CATTLE: Open Outcry (Trading Floor) LC

UQ

Is CL options LO European style? :confused:

Just Unsure whether we are talking about the same product/market of NYMEX exchange-traded American style WTI Crude Oil futures (CL) and options (LO) !?

Q
http://www.interactivebrokers.com/en/p.php?f=ibgStrength&ib_entity=ibg

LIGHT SWEET CRUDE OIL

Underlying: CL Futures
Security Type: FOP (Futures Options)
Right: Call
Multiplier: 1000
Trading Class: LO
Exchange: NYMEX
Exercise Style: American

UQ
 
Believe or not: Hedging is All about Timing!

"
http://www.ft.com/intl/cms/s/2/e6d6da2e-ebf8-11da-b3e2-0000779e2340.html

The importance of timing

Perhaps the crucial factor in the success or failure of a hedge is its timing. This point has been illustrated dramatically by the airline industry in recent years, where some players have moved to hedge at the “right” time while others have jumped on the bandwagon at the worst point imaginable. Leading the former category is Scott Topping, corporate finance director at Southwest Airlines, a US low-cost carrier. He hedged his company’s fuel costs at a crude oil equivalent of $25 a barrel for 2005, and progressively higher prices all the way up to 2009. By contrast, most other US airlines waited until oil reached the astronomical figure of $60 before resorting to similar measures.

Different hedging strategies meant that Southwest faced an average cost of fuel of $0.95 per gallon in the third quarter of 2005, compared with $1.56 for Alaska, $ 1.70 for JetBlue and upwards of $1.88 for Continental and American Airlines respectively.

Southwest’s impressive results coincided with JetBlue’s first losses in five years – all because of hedging. David Neeleman who, as the founding CEO of JetBlue, engineered one of the most successful airline start-ups of all time, announced a comprehensive restructuring plan this year. This included the creation of a new vice-president position for fuel purchasing, and a hedging programme (through collar options, which restrict both upward and downward price movements to a narrow band) covering 35 per cent of 2006 needs at an average $68 per barrel, versus an equivalent coverage of 20 per cent in 2005 at less than $30 per barrel. Delta and Continental are scrambling to hedge their exposures at the going rate, abandoning previous non-hedging strategies
"
 
http://www.futuresoption.com/oil_futures_symbols.html

http://www.futuresoption.com/commodity_symbols.html

Q

Oil Futures Symbols

Listed are symbols on oil commodities and the exchanges for trading.

Oil Future Symbol Exchanges
WTI Crude Oil (light sweet)1
CL
New York Mercantile Exchange (NYMEX)
Crude Oil access
CLA
NYMEX
1The benchmark of Texas Light Sweet/West Texas Intermediate.
Sour Crude Oil
SC
NYMEX
Heating Oil No.2
HO
NYMEX
Heating Oil No.2 access
HOA
NYMEX
Brent Blend Crude Oil 2
LO
International Petroleum Exchange (IPE)
Gas Oil
QS
IPE

The International Petroleum exchange as ICE trades contracts electonically for natural gas, coal and electricity energy with 2 Brent Blend, the benchmark for Europe.

The main energy, metals, grains and soft futures symbols at commodity futures symbols and which are listed by trading exchange.

Trading option symbols gives an explanation of the symbols for options and their sequence of appearance.

An explanation of commodity order types and their significance.

UQ
 
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