You don't need to get caught with your pants down when selling naked options

Does selling options have a role in commodity risk management?

Many commodity risk managers would shy away from even using options in the more traditional risk sense - buying calls to protect against rising prices or buying puts to protect against falling prices.

But a recent intriguing article (https://iml.com.au/why-options-arent-as-risky-as-you-might-think/) from an equity fund manager in Australia, made an interesting argument about enhancing returns through intelligent option selling.

It would seem this strategy might have direct application for commodity risk managers. For example, if you know you have to buy a commodity and have some capacity flex you could sell put options on that commodity. Then if the put gets exercised against you, you get to buy the commodity at the lower price and have earned option premium as well, further reducing the overall cost.

This could work equally for commodity producers by selling calls. If the call is exercised, then you get to sell at the higher price and enhance the sales proceeds with the option premium.

The key is ensuring there are definite purchases or sales required. If the sold option decreases substantially in value by moving further out of the money or diminished volatility the company could also simply buy the option back and close out the sold position. Generally though, the option would be exercised against them or allowed to lapse. To see how this strategy and other more traditional techniques can help you better manage your risk please contact us or book a demo.

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