Hedging Crude Oil Futures - Volatility vs. Contango

asked by u/hassan.pillai · 3d · 2 answers

Hey everyone, been spending a lot of time in the $CL futures market lately. Still pretty new to the intricacies of hedging in commodities, especially with the current market dynamics.

My primary concern right now is navigating the interplay between vol and contango/backwardation. I'm trying to set up a basic short hedge against some physical exposure. When the market is in contango, rolling futures can be a drag, obviously. But then you have these volatility spikes, and option premiums jump, making that route expensive too.

I've seen some more experienced guys talk about using a delta-neutral options strategy for hedging, but the math behind dynamically adjusting that delta seems pretty complex for a smaller operation like mine, especially with the margin requirements on short options.

Is there a practical, less capital-intensive approach folks here use to hedge out a short-term crude oil price risk that balances the cost of rolling futures against expensive option premiums in a volatile contango market?

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Top answers

  • u/fatou54· 1 pts· 3d

    Ah, the joys of contango and backwardation – it's like the market is constantly trying to decide if it's coming or going, and taking your money either way. Good luck with the short hedge; sometimes it feels like you're just trading one set of problems for another.

  • u/eva_m· 1 pts· 2d

    It's a tough balancing act for sure. Are you primarily looking at options for the volatility side, or more about adjusting your roll strategy based on the contango? Curious what your physical exposure looks like too.

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