Hedging Rising Oil Prices 2/25/12

The company I work for got hit with several million dollars of higher material prices on plastics last year. That made me think about how the company could reduce this volatility and have more predictable performance results based on manufacturing operations only.

Plastics is made from oil. When oil prices rise, so do prices on a wide range of plastics. So why not hedge oil? Sure, that would be quite easy to do with oil futures. People who are in the agricultural business do that with crop futures. So why not hedge oil for rising plastics prices? Buying a hedge against a known position lets you stay neutral to the price of the material as it stands now at a future point in time. When oil prices rise, the oil futures price would also rise. My understanding is that our company does take a hedge on a material that we consume in large quantities. That is good but there is a better method.

Using dynamic hedging techniques, I could stay long on oil futures as long as the price of oil was rising. When the price of oil starts dropping, it would be better to drop the hedge and let material prices decline and increase company profits when plastics become lower in price. The only catch is that most financial people do not know how to do dynamic hedging. Maybe one day I could do this for our company and for others but in the meantime, I could practice this on the family portfolio and finances. Our family uses gas for the two cars we have and gas prices are rising. So why not practice dynamic hedging on it?

The hypothesis is: I want to be hedged against rising gas prices and not feel any negative affects.

I am tracking two ETFs for oil; one being OIH and the other USL. I am long in my position of OIH and have already generated enough profits to fully offset a potential rise in oil prices for the next several months. When I see the system generating an over bought situation or generates a down signal, I will exit.

Meanwhile here are the charts of OIH and USL with a trading system I am using on them signaling when to go long and when to exit.

Pull Back 2/15/12

It looks like a pullback in the making. The rise has been sharp and steep and the market has to pause for breath. The short term averages are running away from the long term and that cannot be forever. AAPL paused and appeared to halt the whole market.

My chart on CAT shows a pause as well and I have closed out my long position. I am hesitant to take a down position only because the broad market trend is up and I hate to bet against the broad market. I have also closed out my position on AMD at a nice profit. Entered at 5.66 and closed out at 7 something. The exact numbers don’t matter. My system is still long but the short term cycle indicators are saying pause. Better to be safe than lose profits.

Still holding on to my GLD position and of course I am also strongly long in my 401K positions. I had added some more SPY put options in as a hedge against the long position. That means I am still long but a pull back will mean less loss. Went back long in TIP as well.

Here are some of the charts on CAT and AMD.

401K Analysis says Go Green - 2/5/12

It is Sunday morning and the first week of the month. That means it is time to do my monthly 401K analysis to select where to put my 401K money among the various mutual fund choices I have in each of the two companies that I have my Fidelity 401K funds in. One is my current company and the other is my previous company.

Cranked through the numbers and what they are saying is Go equities. Previously it said go partially long in equities and partially in Fidelity Government Income fund. My current company analysis is suggesting Royce Opportunities fund, Mid Cap and Fidelity Growth Strategies.

The previous company selection is Vanguard Explorer Admiral, Fidelity Extended Market Index fund and Artisan MidCap fund. Real estate is also moving but I have to avoid funds that make me stay in it 90 days or else they charge me redemption fees if I exchange it to money market before the 90 days of holding period. I noticed that Fidelity Government Income fund is now near the bottom of my list. The time to stay in it is over.

This is certainly a change and is in line with my early signal on 12/23/11 on SPY to go long. I am already vested partially long in the markets and with this analysis I will put my foot in deeper into the waters. I don’t like taking risk but I also don’t like leaving my money under the mattress doing nothing. I will go in but I will keep some level of hedge on should there come a Black Swan like event. I am currently re-reading Taleb’s book “Black Swan”. It is recommended reading.