The supply from U.S. could swiftly rebound on the recent recovery in prices. After dipping the production for months now is the good news from the U.S. shale oil companies.They confirmed that plants are ready to bring rig back into service setting up the first big test of their ability to quickly react to rising crude prices. As prices fell in last couple of months, shale companies pose frantically to dysfunction rigs.The price slump in crude and its historical association suggest that the current production in mines are overreacting, some of the major oil corporations in US confirms that they would ramp up the production outputs if prices gets stabilized. Also demands the US benchmark WTI manages to hit $70 per barrel.Brent crude oil increased to 66.70 USD/BBL in May from 64.57 USD/BBL in April of 2015 whereas WTI settles at 60.35 a barrel.Hedge against expected rise in crude price:Long Crude Oil Call Options:As we are slightly bullish in the near term on crude oil on the back of good news pouring in, it is advisable to hedge this commodity against global market risk. As we are projecting the prices to surge up in near term hedging through call options can be more profitable for commodity traders.Let’s elaborate this strategy with a live scenario:Consider the prevailing price of light sweet Crude Oil (WTI) in NYMEX at spot 60.35 per barrel; let us assume call option of this underlying commodity with the near term expiration and a nearby exercise price of USD 60.00 is being priced at USD 4.5/barrel. The underlying light sweet Crude Oil futures contract size in NYMEX represents 1000 barrels, the premium you need to pay to own the call option is USD 4500. At expiry if the crude oil price reaches at USD70/ barrel thereby call holder will have right to execute the contract obligation.Hence, the profit from such arrangement would be as follows,Returns from call exercise = [70.00 (future price) – 60.00 (strike price)] * 1000 barrel = USD 10000.Cost of hedging = Premium paid in the beginning + brokerage (let’s say USD500) = USD 4500 + USD 500Total cost hedging = USD 5000Net returns = 10,000 – 5,000 = USD 5,000Imagine this is only for 1 lot (i.e. 1000 barrels), whatif a professional commodity trader takes these positions how many dollars might have been saved his but it requies smart money mangement skills as well.
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