Tackle Today: The Case for Oil as a Hedge
October 17, 2023
It is a Reasonable Proposition
Coach Mark here.
At Tackle Trading the idea for oil as a hedge against your portfolio has been gaining steam over the last week. My brother Matt and I in the recent Trading Justice podcast (can listen to it here) discussed the case for a 4th quarter rally. I will not lay out that case here but we think it is a solid one. The big wild card that could derail that in our opinion is if we get an oil shock.
If the current war were to escalate into other oil producing countries the price of oil would naturally move up. It could move up quite a bit as well. Not only would rising oil bring increasing inflationary pressures but there would be economic pressures as well creating a nasty stagflation scenario. There is little chance that equity markets would do well in the intermediate term in that scenario.
Typically hedges in portfolios are through put options or put spreads on individual stocks one might own or the broad market as a whole. The interesting concept of using oil as a hedge in lieu of these instruments is that there are scenarios where you do not lose money on your hedge if your portfolio rises, which is a mathematical impossibility with the use of put options. There are scenarios that oil rises and equity rise or one rise and the other stays flat. We were making a case for oil long before the tragic developments in Israel unfolded and think there is a good fundamental case independently.
It is possible that both equities and oil fall but in the coming months and the traditional put buying/put spreads would be been a better choice. That is not where I land in my analysis but it worth pointing out.
Just some food for thought for you traders out there looking to make decisions in interesting times. Listen to the Trading Justice podcast for more in depth analysis. Have a great Tuesday.
Chart of the Day: Crude Oil (/CL)
We are always on the lookout for technical signals. A break of recent intraday resistance on oil aligns with the 20-day moving average and looks interesting for those looking to add oil for whatever reason.
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