Buying pump protection by trading a synthetic call

As mentioned in my previous article the economic situation remains fragile. I believe that low interest rates or the stimulus packages promoted by several of the world’s governments will lead to a renewed bout of inflation in the years ahead.
But we are not only dealing with the problems of the EU. Due to hot weather, commodity prices are going through the roof. This is an issue for most people as  energy costs are a main source of people’s monthly expenses. Crude prices have experienced widening swings over the past month. The 10-day historical volatility for New York oil futures is trading around the 65.13 level compared to 16.30 on June 15. It reached 65.89 on July 3, the highest since May 17, 2011.

 
Source: Bloomberg

Last week oil prices slumped after Norway ended its longest ever energy industry strike. As a consequence Europe’s second biggest oil and natural gas exporter warned the industry not to use ultimatums that risk cutting supply. I wonder if oil wil continue to trade off or if prices are going to bounce? One thing I know for sure is that modern economies need energy and it will be quite a while before renewable sources can supplant carbon based fuels.

 
Source: Bloomberg

So what can I do to protect myself. I believe the best way is to trade a synthetic long call. A synthetic long call is created when a long stock position is combined with a long put of the same series. It is called a synthetic long call because the established position has the same profit potential as a long call. 

Example
Long 1000 CFD US Crude September at 84.75
Long the September Light Sweet Crude Oil 84.50 put option – 1 contract a 3.90 ($3900)

It this case you have paid 3.9 points for September long contract for difference (CFD) protection. When oil trades up you will benefit with a profit on your CFD and have hedged your energy costs. If the markets drop you are protected and even better yet you will profit from lower energy costs e.g. lower priced oil wil reduce your energy bill.

As mentioned before there are additional benefits to doing this with synthetics - after all, you could have just bought the call. Synthetics are more flexible because they are created with more than one position, meaning you can close positions at different times to take advantage of developing situations. For example, if you are happy with the profit made on the CFD position, you can close the oil position and hold on to the put waiting for prices to come off.