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It only takes a few thousand dollars to open up a commodities options account. I assume that everyone here has already considered what is going to happen to oil prices over the next five years, and has already committed funds to 2013 oil options.
Five years ago, I calculated how much oil my immediate and extended families would need over the next forty years, and for a relatively modest price (then) I was able to purchase nearly ten times that amount of oil in the stock market. Along with ELP, it would seem to make sense to be doing that now. It is, in my opinion, far better to spend $3,000 to control a large block of oil five years from now, than to spend $3,000 in a mutual fund in an IRA. Of course, if I had credit card debt or an unaffordable mortgage, I might spend that $3,000 elsewhere. But it is cheap insurance.
As part of ELP, I think it is important to turn paper into hard assets-- and the liquidity offered by cash can nowhere near match the liquidity of WTI crude.
Appreciate the validation, possom. Curious- what did you calculate as 10x oil for your family?
I figured about 1400 gallons of gasoline per person, equivalent, per year, which meant 4200 gallons per year for a family of three, which translated into (surprise!) 100 barrels per year. Multiplied by 10, that was 1000 barrels. So, I needed to control 40,000 bbls worth of production in a long-lived reservoir, such as heavy oil. Our actual consumption is much less than that now.
I assume that that 1400 gallons was taking into account a whole range of energy uses, not just transportation. Certainly hedging against natural gas is as important (certainly in the UK where power generation is so dependent on it). I'd worked out that 250 gallons was more than enough car wise, not sure about other uses.
Anyone know where to source good commodity options figures for distant times? It would be interesting to do the calcs to determine what investment would be needed now to hedge against future movements. Might be a better place for money than the stock market. Would also be interesting to determine how you could hedge against food prices.
Hedge against food prices? Buy lots of pasta and grains now. Dry goods, if stored properly, can keep for a good while. Pasta, rice, beans, and Textured Vegetable Protein. You can even venture into freeze-dried vegetables and fruit if you like.
That's not a hedge, that's just preparing a backup plan.
What I'm saying is can you buy REAL futures in foodstuffs such that if the price of food goes up, your options increase in value as well and the net effect is to remove the price risk?
As I noted just above, I have not found options to be readily available far-out. There seem to be very few who are willing to sell naked calls these days, not least since those who have done so for the last couple years have "gotten their asses handed to them" in the words of one broker.
Here's one link which I don't think is proprietary... but just because something shows up here doesn't mean "you" could get it; apparently the 'settlements' between large institutions show up, but that doesn't equate to the "street value" of what someone in the NYMEX pits will actually sell you one for.. IF they'll sell you one at all. At least that's what I've been given to understand. These charts show very few options during trading hours, and not all of those are 'available'; after hours the settlements will be included and give rough values, except that there's a premium added to those values if you were to buy...
http://man.barchart.com/pl/man/ib/optqte.asp?sym=CL&mode=i
Lotsa luck... and if anyone can correct any wrong impressions I have, please do!
Do not depend on the counterparty to be there to honor the contract.
But right now I can buy gasoline for $3.05.
NYMEX wants $2.72.
No one can ship gas, much less make it. for .33.
$103.30 and gas retail at $3.05.
That's command economy folks and it'll work just as well as the Soviets'.
CBOT Wheat up $1.73. Corn up $.13 Soy up $.43
The gas stations make it up by selling coffee and soda pop.
I spoke of this before, the April railroad contract diesel price is $3.79/gal, now that is without road taxes. I think the cost of goods will be going up once more, very soon.
Maybe. But I'm talkin' about the refiners.
Refiners can turn $103 crude into a profit with $3.05 gasoline?
According to all the top notch petro engineers we have here,
isn't that some kind of a miracle?
Some other factors.
Refinery utilization and crack spread are way down.
Gasoline inventories are up.
There are some large subsidies at work for big oil and ethanol.
Likely changes coming later this year include $4 gasoline because.
Increased refinery utilization and crack spread due to seasonal demand.
Possible repeal of some subsidies.
Dollar fall continues (OPEC Russia act to support $100+ floor).
Slumping exports higher duties from places like Russia (MELP)
Seasonal additive shortages.
Retailers adjust to new paradigm. (next refill surprizingly costs more (lack of expected end of season price relief), fewer value added customers)
Election outcome becomes factored in.
If you think that the price of oil will continue to rise for several years then the future is definitely NOT BAU, many things may not be working as they do now - including derivative and futures markets - especially if the counterparty is heavily out of the money!
This has been my concern. I have a lump of cash, where to house it? commodities contracts? Foreign currency? Gold? What markets are most stable and likely to have the contracts executed and not leave you with empty paper. If I want that I can keep it in greenbacks. Any thoughts? And just to keep this oil related, I need to protect my assets so I can buy oil in the future don't I?
Well, if you'd be OK with a half-assed opinion, I have arbitrarily assumed that NYMEX will function through 2012 and perhaps through 2013, I wouldn't buy farther out than that. As I say, that's an arbitrary call.
Before it all falls apart, there could be some spectacular money change hands.
I don't think about money much... like Forrest Gump said, one less thing to worry about... since one can live fine at present on a tiny fraction of what the 'normal' american takes in and spends. But I can relate to it as a game, and I do want to see my family do alright. I also find that having a bit of $$ can be useful to jumpstart advocacy programs. Plus, if buying up options actually DOES raise the price of oil, GREAT... let's all help send a price-signal to the conspicuous consumers.
One does not really have to depend on the counter-party much in futures trading, as far as I understand it. Every day the value of my account is recalculated based on the settle price. I am then free to remove the excess money above my margin requirements, and do so on a frequent basis. The person on the other side has to move money into his account every day to keep the margin above the 7.50 per barrel margin limit or his positions are liquidated. Above, someone mentioned a 3,000 dollar margin requirement, but that has been raised to about $7500 per 1000 barrel contract in the last few months. The only money you would stand to lose would be a sudden move of oil more than $7.50 in one day, which could theoretically wipe out the conterparty and put him so far under water that even the margin money on hand wouldn't make you whole. My broker assesses a small (cents per trade) charge which is kept in escrow for such events and has reinsurance over and above that. There are a lot of risks in playing commodities, but counterparty risk is pretty far down my list of worries. To the guy above who said he's holding the equivalent of 40000 barrels of oil, or FORTY long contracts, hope you are literally keeping a mountain of cash on hand because you are controlling like 4 million in underlying oil assets. A 10 dollar retrenchment is going to cost you 400 grand to keep your position open--and that would only take the price of the 2012 contract back to the high eighties. There were a lot of guys who were peak aware that got washed out last January on that big plunge. No conciliation in being right long term if you go bankrupt in the intermediate time frame. I have ten long contracts with about half a million cash in immediate demand accounts, yet it still keeps me awake at night sometimes worrying if I have enough set aside. Good luck and hope it all works out for you.
Good points, especially on counter-party risk (which I agree is not an issue), but I believe the poster who was hedging his future oil needs was using options, which limit his downside risk to the price of the options.
Thanks Johno that does answer some of my commodities trading questions, but I think it is the bigger societal structure questions that I really have. Maybe these are questions ala Orlov or the changes coming are just to big to have answers. But in past upheavals what markets or bourses? ( If I am using that correctly) are most likely to continue to exist, as we are seeing banks can go belly up, sometimes even cities as alluded to above.
Yeah, my biggest concern is not so much counterparty, but more that the government will step in and help themselves to my 10000 barrels of oil, which I could physically claim when my contracts come due. Either that or just put the exchange of indefinite holiday. I bought my contracts in the low 70's, and have putting about a third of the profits into untraceable gold and silver, while using the rest to buttress my cash reserves in case of a price downtun. When oil hits $150-200 I'll probably close out entirely and put the whole thing in PM's, even though I may be leaving a big part of the oil run-up on the table. Also, I have "sold short" some of my gold on the exchange to earn interest income. Partially shields me from gold's fluctuations while allowing me to keep all the gold in my physical possession. Only way I know to earn a guaranteed income without having to use the banking system. 5% isn't gonna let me retire to Monaco, but at least I don't have to depend on the FDIC to make me whole.
A concern that I have about planning too far into the future with oil contracts is Force Majeure and how it could apply.
Have you considered this risk, and can you recommend anywhere to find out more?
(for example Shell's Nigeria ops have declared this in the last year or so)
If this is an ignorant question please go easy on me :-)
"A concern that I have about planning too far into the future with oil contracts is Force Majeure and how it could apply."
The NYMEX crude contract specifies only Cushing, OK as the physical delivery point. The exchange has rules for Force Majeure - e.g. alternative delivery points, delayed delivery, etc. Natural gas delivery during Katrina in 2005 was the only time Force Majeure was declared by NYMEX.
The precedent is 1933 when Roosevelt outlawed gold bonds, bonds that required payment of interest in gold.
Your contract may be taken over by the government, or just the oil that is produced in the US. Don't know how they would handle it.
The NYMEX website states "Transactions executed on the Exchange avoid the risk of counterparty default because the NYMEX clearinghouse acts as the counterparty to every trade. "
johno, who is your broker? I've started with Lind-Waldock and use the online trading tools which seem to work pretty well although maybe not as good as having a man on the floor during open outcry trading. But I save a few dollars on trading and I might miss a cent or two on the bid-ask spread, but we peak oilers are long termers so its not really material. I'm in at 6 contracts now but I want to get up to around 10 to 12. I'd like to see enough of a correction to be able to get back in cheaper. Right now I'm in long from the 80s with Z10s and Z11s. The backwardation sweet spot seems to be in that time range. The later contracts are progressively more expensive (but not much). The 10s and 11s also have more liquidity than the later stuff. Question: (touched on earlier) I understand marking to market upon each closing trade day and I understand force majeure. What happens if a producer sells x contracts for delivery in y time, anticipating production to cover the contracts written, and then is unable to deliver due to failing production? Let's assume that the contracts reach the due date and each party has to deliver. I'm not totally clear on the possible outcomes there.
I use MF Global (Mann Financial). I set it up and funded it through Etrade. I wouldn't call myself an active trader, I pretty much bought an amount of contracts roughly equal to my total net worth, stuck 40-50% of that amount in cash and short T-bills, and plan to hold them to near expiration, when I may roll them further out. I have been selling a bit as oil has run up (I started with 14 contracts and am down to 10). I've been pleased with the platform and with the customer service (I have to call them when I wire money in or out--mostly out up to now ;>). The trading fees are nominal, and I keep an Etrade saving acct linked to it so the wire fees are only 7.95 out of Mann and free to transfer in. My only gripe was when NYMEX rose the margin requirements. The way I found out is when Mann called me for a 100,ooo dollar margin call. An email, or call or some kind of fore-notice would have been nice, though I guess one could argue that if you don't have the cash on hand you shouldn't be trading commodities in the first place. I don't have any experience with options. I don't know all the rules on delivery, as I don't really plan to take physical possession (I guess I could put in my swimming pool...). I do know it varies with the commodity, most of the mini contracts actually specify a financial rather than physical settlement. In most cases the counter-party would have to buy in the open market to cover their contract. Futures contracts represent a pretty small percentage compared to the total spot monthly activity, so I wouldn't think it would be a problem for them to cover, though they make not like the price at the point (he,he). I also think financial settlement is also possible in extreme circumstances if both parties agree, but don't quote me on that. Pretty sure it happened with silver back in the early 80's when the Hunt brothers tried to corner the market, people were allowed to buy their way out of their contracts rather than driving the market higher chasing the diminishing amount of bullion on deposit. Silver bulls have been screaming since, but it was way before my time.
But right now I can buy gasoline for $3.05.
NYMEX wants $2.72.
The $2.72 is for the April delivery, so the pump price will go up. I think the March contract expired around $2.50 or so last week, and the Feb. contract expired 10 or 20 cents below that in Jan.
Hi Olepossum.
I pretty much followed your same logic RE hedging my family's future by picking up some oil options, and haven't regretted it.
However, while futures contracts are available quite far out, options don't seem to be. My broker can't get me any out-of-the-money naked crude calls past 2011 and those are pretty hard to come by.
Is he right, or are others here finding options available for sale in farther-out years than that?
I prefer options since the amount of risk is stable and the cost relatively low if you buy them out of the money.
cheers...