Hedging a bet

[Ward Smith + 6,615]

[Ward Smith + 6,615]

Some additional commentary here.

Comments, criticisms? 

Years ago Harold Hamm was lambasted for hedging too much of his production. Other than a small miscalculation (the under 45 part), Oxy did a smart move. Smarter perhaps than a lot of other operators running naked right now

[Geoff Guenther + 317]

Holy crap - what CRO would let them get away with this?  Well, they might get away with it if oil starts recovering by the end of the year. I had no idea they paid for the put with two years of calls.

[Ward Smith + 6,615]

1 hour ago, Geoff Guenther said:

Holy crap - what CRO would let them get away with this?  Well, they might get away with it if oil starts recovering by the end of the year. I had no idea they paid for the put with two years of calls.

It's a three way collar. Actually fairly brilliant, except for the range issue. A friend asked me how to get into oil futures and I described an idea like this (more of a European collar) and he didn't understand so I went looking and found this example. A friend in college got a job working for a lumber company doing similar hedging. They ended up firing him because he was making them too much money trading, and got away from their model, which was making the most money they could from wood sales. IIRC he was selling puts that were effectively driving the price down. 

I'm guessing he went on to make (or lose) millions for some trading firm. 

[Geoff Guenther + 317]

That's awesome. Oxy (and Buffet) got incredibly lucky on this one. All of us could use a bounce like this every now and then.

[Ward Smith + 6,615]

20 hours ago, Geoff Guenther said:

That's awesome. Oxy (and Buffet) got incredibly lucky on this one. All of us could use a bounce like this every now and then.

There's nothing stopping you from doing the same. Right now the oil laggards are scrambling to buy puts out into the future. You can sell them those puts and pocket the money. Of course they're naked puts, so you should cover your ass with some calls, which you'll have to buy. Overall you should end up with free money in your pocket for just having intelligence and knowing math. 

90% of traders lose money. They're like @Zhong Lu, using emotion instead of straight up reason. A good friend of mine has been a full time trader for decades, first managing his own account and now managing for his family's accounts. He used to make a bunch, then lose a bunch. I forced him when he was positively suicidal to use his head and start doing collars. He ran this huge spreadsheet and said, "this is impossible, I make money with no risk". I said, "Yup not as exciting but not as dangerous either". Fundamentally, he's just a gambler, and used to get comp'd suites in Vegas for the high rollers, which he was. It's an addiction I don't share, I was a math major, doing odds is 2nd nature to me, so most gambling leaves me flat: Too much chance, not enough skill. 

You can make a steady 10-15% per year doing nothing but collars. Not "screw you" money, but a decent return year in year out. That's what my friend is doing, and he's built up tidy portfolios for his brothers and sisters. Like a hedge fund, he takes 20% of the winnings only. But he still runs an account for himself the old way, which is flat out gambling, and keeps his addiction at bay. He's just gotten smart enough after getting crushed back in the day to only have a small piece of his action in that account. He even pretends that it's another client, "Fast Eddy". I'm wondering how Fast Eddy is doing right about now. I should send him a text and ask. 

[Ward Smith + 6,615]

Good discussion today in World Oil on this

It's almost like they're reading our posts here. 

Remember, an oil company has an agenda, like the lumber Co they are looking to receive maximum prices for their product. But if you're just a trader, you don't care about their problems. 

 

[Ward Smith + 6,615]

On 3/13/2020 at 8:11 AM, Ward Smith said:

"Fast Eddy". I'm wondering how Fast Eddy is doing right about now. I should send him a text and ask. 

Texted him Friday, glad I did, we've fallen out of touch these past few years. He called and we chatted and while we were talking he told me about a "bet" on the S&P for Friday alone. Just had to guess whether it was going up or down. We talked about up and he said, "Gotta go" and made the trade. Trump gave the rose garden speech and my friend made a tidy profit, one of Fast Eddy's best days ever.