how to hedge against oil price collapse?

Quote from clacy:

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.
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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.
 
Quote from atticus:

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.
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Yes, I can read too. So, where does it say his entire portfolio will be wiped out? I get it. As crude falls, his work dries up. If it goes below a certain price threshold, he may not have any work.

That doesn't mean his entire portfolio is wiped out unless he is in a capital intensive part of the business and has large loans on equipment and such. But he could very well be in a business that doesn't require a lot of capital and/or loans, in which case his income ceases, but he still has assets to work with.

I have a multi-million dollar business as well. I'm in a capital intensive business, and I'm PG'ed on some very large loans so I understand the ramifications of a business blowing up. But that may or may not be the case for him. Also, there are plenty of ways to protect some of your assets through ERSA protected retirement plans, that creditors cannot go after.

I'm not sure why we're even arguing. I am not debating options strategies with you. I am just saying there are ways to position a portfolio that can provide a real return with the lion's share of your money, and then to buy catastrophic insurance with a small percentage (via options or other).
 
Quote from clacy:

Yes, I can read too. So, where does it say his entire portfolio will be wiped out? I get it. As crude falls, his work dries up. If it goes below a certain price threshold, he may not have any work.

That doesn't mean his entire portfolio is wiped out unless he is in a capital intensive part of the business and has large loans on equipment and such. But he could very well be in a business that doesn't require a lot of capital and/or loans, in which case his income ceases, but he still has assets to work with.

I have a multi-million dollar business as well. I'm in a capital intensive business, and I'm PG'ed on some very large loans so I understand the ramifications of a business blowing up. But that may or may not be the case for him. Also, there are plenty of ways to protect your assets through ERSA protected retirement plans, that creditors cannot go after.

I'm not sure why we're even arguing. I am not debating options strategies with you. I am just saying there are ways to position a portfolio that can provide a real return with the lion's share of your money, and then to buy catastrophic insurance with a small percentage (via options or other).
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I hear ya, "out of business" is pretty ambiguous.

He asked for a hedge; not a balanced eq portfolio.
 
Quote from atticus:

I hear ya, "out of business" is pretty ambiguous.

He asked for a hedge; not a balanced eq portfolio.
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Fair enough.... I'll leave the complicated, option hedging strategies to you. That's your arena for sure.

I just wanted to throw my $.02 because I think it's important for someone to take their income source into the equation of how they balance their portfolio. Some of the long term hedging can be handled through asset allocation.

We all should hedge via portfolio allocation in some shape or form, IMO. A pharmacist probably needs a different allocation than someone who owns a crude oil (boom & bust) business. The pharmacist can be much more aggressive, IMO and the OP has to be more defensive, knowing that 2 years from now his business may go ka-put.

In the case of a trader such as yourself, you probably hedge your trading business with a large amount of liquid cash.
 
Quote from clacy:

Fair enough.... I'll leave the complicated, option hedging strategies to you. That's your arena for sure.

I just wanted to throw my $.02 because I think it's important for someone to take their income source into the equation of how they balance their portfolio. Some of the long term hedging can be handled through asset allocation.

We all should hedge via portfolio allocation in some shape or form, IMO. A pharmacist probably needs a different allocation than someone who owns a crude oil (boom & bust) business. The pharmacist can be much more aggressive, IMO and the OP has to be more defensive, knowing that 2 years from now his business may go ka-put.

In the case of a trader such as yourself, you probably hedge your trading business with a large amount of liquid cash.
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I understand what you're stating, but there is no way to know his financial situation. For my caterer buddy it's 10% of his gross; for this guy it's his entire livelihood (likely).

It's akin to telling a GS partner to hedge his RSUs with PG shares. Worse, as a servicing-gig there is no equity hedge. He can't just sell HAL stock. Any hedge gains would be largely coincidental and of limited value.
 
Agreed. I'm not advocating that his asset allocation strategy does the heavy lifting for his hedge.

I guess to summarize, I would advocate that his overall portfolio is such that it provides a positive, real return, but is stable in the event of a crisis ala 08. The last thing he needs if he's out of work, is for his retirement porfolio to be chopped in half because he's 100% stocks or for him to take a 25-30% loss on a 60/40 stock/bond allocation.

Nassim Taleb 90/10 strategy seems perfect for a guy like the OP.
 
Quote from toben:

Hello

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!
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Seems you're taking the risk by asking some (as you consider them) Simple hedgng questions on an elite speculators site, rathre than an expert hedgers site! How are you going to hedge this risk? :)
 
Quote from OddTrader:

Seems you're taking the risk by asking some (as you consider them) Simple hedgng questions on an elite speculators site, rathre than an expert hedgers site! How are you going to hedge this risk? :)
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I suppose you're fully aware how much fair value of Free advice (like mine) on most public sites! :D
 
Let me clarify.

I am investing $500k in a business and need to hedge my investment.

I need a 250k payout if oil falls to $60 and a $500k payout if oil falls to $50 per barrel or below. If oil stays high I am protected.

This is not all of my portfolio. I am only looking for an insurance policy to guard against a drop in oil prices. I dont need gold or other investment advice.

Help identify how much money I need to spend to protect myself. $5k annually? 10k? $2k per quarter? Help show me exactly what to buy. 2014 cl puts at $50? How many at what cost?

My hedge position can fall to $0 as long as oil prices stay high and I can keep paying $5k or whatever every year as insurance.

Thanks
 
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