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Inspired by this article Hedging Against Rising Heating Oil Prices using Heating Oil Futures, I wonder whether hedging against rising oil and gas prices makes sense for private households, too? If so, which financial instruments are particularly useful?

Many people claim that a big amount of their income goes to heating and electricity directly. Consequently, they are hit quite severe by a sudden increase in the prices of the underlying commodities.

Thus, even though they do not use a million barrels a month, it might still make sense, right?

In which case this thought is not entire without merit: Of course, the average person will be most likely less informed about all the available instruments. However, households could also team up in some kind of association, to follow just that common interest. Are you aware of any such institution?

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My gas and electric bill average $600/mo or $7200/yr total.

While I believe there's merit in the idea, it would need to be structured in a way that was easily transacted. For example, the oil company (I mean your deliver guy) would tell you the price today is, say $1/gallon, but in exchange for you paying a slight premium, maybe $1.05/gal, he will fix the price for a full year.

Given a total bill of the $5K range (mine is above average, I'm sure), even with swings of 20-25% over a season, it would still take some effort to create and sell what you seek, but to hedge a potential $1000-$1200 type of risk. How much would you be willing to pay to lock in a price for a year?

As I said, interesting idea, tough to execute.

Update - Just as an example, a 1 year option on USO (an Oil ETF) has a premium of 15%. The ETF trades at $36.20, but a Jan '12 option at $36 costs $5.60. The cost to execute this is impractical for the intended goal.

  • So, which instrument might be a proper candidate? A "long call", or a future? Where would I find such, and can you make any assessment how much the premium would typically be? – bonifaz Dec 19 '11 at 21:41
  • i updated my answer to address this. – JoeTaxpayer Dec 19 '11 at 21:51
  • Most welcome, sir! There was an instrument created to protect again risk of individual houses. It traded based on indexes for a number of cities. Even with a $100K level of face value, it was tough to market this product. Again, I like your thinking, and believe such a product could work if we lived in a society where everyone were very math and finance literate. – JoeTaxpayer Dec 19 '11 at 22:11
  • Do you remember how this instrument was called? If it's too complicated for John Doe, maybe there is a need of a some association to administrate it for him and others? – bonifaz Dec 20 '11 at 8:06
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Do some personal hedging.

Buy a wood stove for heat. Set up a windmill or solar panels for additional electricity. Move into a smaller, more energy-efficient place so that you don't have to pay as much for both. Or make the place you have more efficient.

Or buy some sweaters in the winter and buy some box fans in the summer.

  • As the context of the question is pretty straightforward about the financial instruments involved, I think your answer is a little bit off-topic and not particularly useful. – bonifaz Dec 20 '11 at 8:04
  • As the context of your question wasn't looking like it was going to lead to much that was practical, I think my answer is more what you need. If you don't agree, that's fine. – mbhunter Dec 20 '11 at 18:39

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