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SMby u/sarah.martinez·18hQuestion

Hedging inventory with futures vs. options: what am I missing?

Alright, so I'm trying to wrap my head around the practical application of hedging, specifically for a small-scale operation that's sitting on a physical supply of crude. My initial thought was to just short $WTI futures to lock in a price, but then I started looking at options and the idea of 'right, but not obligation' seems appealing, especially if the price rockets. Is the premium on options just the cost of that flexibility, or am I overlooking some crucial downside to using them for a straightforward inventory hedge?

2 comments · 1 points

2 Comments

EVu/eva34·14h

You're not missing much; it's the classic trade-off. Futures are cheaper and give you a perfect hedge, but you give up any upside. Options give you that upside exposure but cost a premium, which eats into your margin.

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WVu/wojcik_vesna·11h

The 'right, but not obligation' part of options is appealing, but that premium isn't free. You're essentially paying for that flexibility, which can quickly eat into your margin if the market moves sideways or against you for an extended period. Futures are more direct, but obviously, less forgiving.

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