Hedgehogger

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    • Thu Jan 3rd 21:54 PM | Rating: 0 0
      Commented on:
      Hedging Oil & Natural Gas Stocks With ETF Shorts
      I think this whole argument is much too simplistic and doesn't take into account the inherent operating leverage of an oil company - each company will have a different "delta" to changes in oil given fixed vs. variable costs in their operating model and therefore a 1 for 1 short doesn't seem like a very logical suggestion (especially in such a general manner as you mentioned here) - the idea is in the ballpark but what you really want to do is model that operating leverage and then find a company where you can short the futures curve against they're operating exposure and generate abonormally large cash flows given that you can lock in their future selling price (with the only other part of the equation the volumes feeding into revenue and of course assuming you can model the cost structure effectively) from your perspective as an investor - obviously if the company does some hedging internally then you would build that into the model and short less of the forward curve - you could also try to hedge both input and and output futures curves if you wanted a little bit more of a challenge...
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