how to hedge against oil price collapse?

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.
 
Quote from atticus:

No offense, but his income in marked to CL. A passive sector-weight isn't going to help at all.
More...

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
 
Quote from clacy:

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
More...

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.
 
Quote from ogarbitrage:

This is a question of hedging a unique, identifiable risk, not managing a portfolio of assets. The two are wholly different.
More...

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.
 
Quote from clacy:

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.
More...

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?
 
Quote from ogarbitrage:

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.
More...

Yeah, I just mentioned buying the $65P.
 
Quote from atticus:

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?
More...

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.
 
You must log in or register to reply here.
Back
Top