5 ms·
Can someone explain like I'm five, the trades the author made and how he turned it around to be so profitable? My understanding so far: In 2008, he made a prom
by neil_s 11y ago
Can someone explain like I'm five, the trades the author made and how he turned it around to be so profitable? My understanding so far:
In 2008, he made a promise to buy Mexican Maya oil in 2009, at the 2008 price of Maya. The Mexican government presumably pays him some fees for handling this risk for them. In addition, if the price of Maya goes up in a year, he pockets the difference.
However, if the price of Maya goes down, he still has to buy at the higher 2008 price, but can only sell the Maya on to others at the lower 2009 price. To protect against this risk, he bought 'options' - the right, but not the obligation - to buy WTI and Fuel (amongst others) at some strike price. This is where I get lost. How was he reducing his exposure by selling Fuel, had he bought options at some super-low strike price, thus letting him earn a profit when he exercised those options and sold the Fuel?
Then, what restructuring did he do with the Mexican government in a way that could benefit both Mexico and him?
He had also short-sold WTI - he had bet on WTI prices going down, by promising to sell it in 2009, at a 2008ish rate, allowing him to buy it cheaply off the market and fulfill his promises. This, I understand.
Then, he "accumulated a massive position in Maya", which "strengthened significantly" compared to his hedges. Does this mean that the price of Maya was recovering faster than the other oils that he had bet against, so he was able to sell his Maya at a profit?
- bboreham 11y ago> if the price of Maya goes up in a year, he pockets the difference. No: he sold an option, so the buyer can opt to do nothing; he benefits by just the price of the option. As time went on he bought options in other things, trying to approximate his risk in Maya crude as if it was a blend of those other things. Those options are commonly traded, so are much cheaper than the premium he charged for the Mayan option which was very specialised. > what restructuring He bought an equal and opposite option from the Mexican government for billions more than they paid for the first one. This gave the Mexicans a cash profit, and zeroed out his risk. Why was it profitable? Presumably the billions they gave the Mexicans were less than they'd actually made from the hedges, and much less than the option was really worth.
- ScottBurson 11y ago> To protect against this risk, he bought 'options' - the right, but not the obligation - to buy WTI and Fuel (amongst others) at some strike price. That would be a "call" option. He presumably bought "put" options, which carry the right to sell at a specified price. Then when the market price fell, he could buy at the market price and sell at the strike price, pocketing the difference. A call option is a bullish bet; a put option is a bearish one. I don't know how the restructuring worked. > Then, he "accumulated a massive position in Maya", which "strengthened significantly" compared to his hedges. Does this mean that the price of Maya was recovering faster than the other oils that he had bet against, so he was able to sell his Maya at a profit? That's how I read it.