Energy product producers and sellers are well aware of the cyclical pricing nature of their respective products. The difficulty is in accommodating for outside economic influences that may exaggerate cyclical pricing volatility into hedge analysis modeling. Get the macro economic direction correct and modeling formulas will provide precision timing for enabling profitable hedging strategies.
The foundation for successful commodity energy hedge modeling generally consists of fundamental inputs of supply stocks relative to current and future demand. The future demand component will be more accurately produced by incorporating energy options greeks as a directional compass on market sentiment on macro economic conditions.
Rising put options premium after the underlying futures has regressed from technical resistance, is a good indication to delay locking in long term pricing. However, this is an excellent indicator to sell calls and hedge a long position.
Conversely, rising call options premium after the underlying futures has held support and begun to trend slope positive, is an excellent indicator to lock in fixed pricing to establish a long position on the underlying futures commodity.
The element of risk can never be eliminated. Long Term Capital found this out the hard way when the Black Scholes model they relied upon failed to accommodate tail risk. Having the proper modeling inputs will however, increase the probability of accurately timing a hedging strategy.
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