How I Hedged My Gas Prices

As I had posted in my more detailed article on how to hedge energy prices for everyday consumers, on Thursday I finally got around to personally hedging my gas price expenditures. While I had listed 8 different ways you could do this, I took the simple income approach, which was to sell puts against the gas ETF UGA. I sold two puts with an October expiry for .95 each = $190, or ~$180 after commission. With UGA trading over $32 per share, gas prices will need to drop 15% in order for the UGA shares to even approach break even.

If they drop below, I would have to pay the difference to close out the position or take custody of the shares at expiry if still in the money. This is fine, because with our family's expenditures on gas, and summer vacations on the way, I'm taking $180 now, spending more if prices rise with $180 to offset it or spending less on gas if prices drop.

And sweetspot - if prices stay about where they are or drop less than 15%, I get to keep the full $180 and pay less for gas as well. It's a natural hedge that I outlined further in my gas hedging article. I plan on rolling over this hedge or one of the other ones I outlined for the foreseeable future. Why now?

Just thought I'd pass on my personal plan on lessening the pain of rising gas prices this summer; I would love to hear about yours.

Comments

[whidbey:]

Really interested? Start by voting the current idiots out of office - all who love the environment past sense and hate drilling wells. Then get Obama out of the auto business and let the American market produce the autos that meet the public's needs I suspect NG would be too obvious for the czars but it works. Finally, we could drive less if there were more jobs somewhere close to where we live. Where has the stimulus money gone?

I know these are far too obvious and labor intensive, but one could lose a lot of money playing your game and letting the inmates run the asylum much longer.

Jun 26 10:50 PM

[Everyday Fi...:]

I have to disagree with your notion that "one could lose a lot of money playing your game". It is a simple mathematical certainty that if you create the right hedge, you will either limit your downside by offsetting a loss in puts by paying less in personal gas expenditures or you will keep the option income premiums if prices rise, which is better than doing nothing, which is what 99% of Americans do. They are completely at the whims of the market.

If smart companies hedge their commodities and exposure to energy (and multinationals all hedge their currencies as well), why wouldn't individual consumers? I think it's because they don't understand how. This article and the links therein explain how.

If unsure, just set up a spreadsheet and model out your personal situation. I'm sure it will make more sense then.

I'm glad I've finally gotten around to doing it again this summer after last year's run.

Jun 27 09:03 AM

[Bob van der...:]

Please check the results of Southwest Airlines results on hedging the price they pay for jet fuel against crude oil before investing into the ETF UGA hedge. SWA's bet was a disaster for them in the last year. My theory is that crude oil prices are being driven by fuel prices specifically gasolin and 2009 has become a "normal" year for the petroleum industry. We will see gasoline prices increase some more during the summer. They will then start declining by the end of October and hit bottom with the Last In First Out ad-valorem inventory tax hitting the petroleum industry at the end of the year. Gasoline prices will be back down under $2 per gallon and crude oil somewhere around the $40 a barrel mark.

Jun 27 09:25 AM

[iggyDalrymple:]

Bob van der V,

I would say that Southwest's hedge worked perfectly. Do you think they're upset about the reduction in fuel costs? Do you think that you could do a better job of running Southwest's fuel hedge system? Maybe you could...Maybe they'll be calling you.

The best hedge program was that of Tyson Foods. If commodities dropped, they benefited. If commodities rose, their 'client', Hillary, benefited.

Jun 27 11:19 AM

[kohalakid:]

Selling puts against short positions is just about the sexiest thing on earth.

I love to watch 'em expire worthless, but sure don't mind when they put 'em to me and cover my short at my number.

Guess that means I need to get a life.

Jun 29 03:08 PM

[MarketVViz:]

kohalakid - You could just short call options instead and save on commissions. The risk/reward is identical or often slightly better because call options sometimes have slightly higher premiums than the corresponding put.

On Jun 29 03:08 PM kohalakid wrote:

> Selling puts against short positions is just about the sexiest thing
> on earth.
>
> I love to watch 'em expire worthless, but sure don't mind when they
> put 'em to me and cover my short at my number.
>
> Guess that means I need to get a life.

Jul 02 08:45 AM

[MarketVViz:]

I like your idea of hedging gas prices this way. Although I also think prices are going to come down again before going back up. I'd like to hedge when prices are lower but you never know...

Jul 02 08:49 AM

[kohalakid:]

But on most futures contracts I'd be giving up contango. I like earning the contango AND the put premium. Commissions are not an issue with the rates I pay.


On Jul 02 08:45 AM MarketVViz wrote:

> kohalakid - You could just short call options instead and save on
> commissions. The risk/reward is identical or often slightly better
> because call options sometimes have slightly higher premiums than
> the corresponding put.
>
> On Jun 29 03:08 PM kohalakid wrote:

Jul 02 01:04 PM