FxWirePro: Despite momentary gains WTI’s magic number $25 a barrel on cards, stay short via short hedge or synthetic futures

Crude for delivery in March on the NYME increased 59 cents, to reach $30.46 a barrel after falling to an intraday low of $29.40.

Earlier last week the U.S. oil futures had jumped from $27 dollars a barrel soon after last week's inventory check, but for now the slumps towards 27 should not be ruled out and this slumps resembled for the first time ever since 2003, caught in a broad slump across world financial markets as investors worried that a huge oversupply in crude was coinciding with an economic slowdown, especially in China.

We think the major driver for crude's recent strength is still attributed as Chinese surged imports but the cold weather in North America and Europe follows an extremely mild start to winter in large parts of the northern hemisphere, which had dampened oil consumption.

So from current levels with hedging mindset we recommend shorting near month futures for 1st target towards $27 and even at $25.

On hedging grounds, if crude oil producers can afford margins then employ a short hedge to block in a future selling price for an ongoing production of crude oil that is only ready for sale sometime in the future.

To implement this strategy, crude oil producers has to sell adequate crude futures contracts in the futures market to cover the quantity of crude oil to be produced.

An alternative way of hedging against falling crude oil prices while still be able to benefit from a rise in crude oil price is to buy crude oil put contracts.

Well, if you think margins are expensive in futures, one can even think of alternatives, which is the synthetic short futures is an options strategy used to simulate the payoff of a short futures position. It is entered by selling ATM call option with positive theta and delta closer to zero and going long in an equal number of ATM -0.49 delta put option of the same underlying futures and expiration date.

This is an unlimited return and unlimited risk futures options position that can be constructed to hedge a long futures position, often as a means to profit from an arbitrage opportunity.