RE:RE:Thank you Vinnie What you guys dont understand is that hedging is not sybonymous of insurance. For example:
Scenario 1
Oil is at $40 , I sell call options on all production , thus presell everything at say $50, for next month.
If the price goes to $70 I have to sell at $50 yes but also pay the difference between 50 and 70, thus at 70 I lose 20 a barrell and must pay that to the option holder. This is what I think CPG did.
Scenario 2
To be prudent however and not take as big a gamble I would have initially bought a call for all production at $60 thus reducing gains but reducing risk. In that case the loss would be only 10 per barrell.
This is not what CPG did i think.
You can sell puts too, so the sky is the limit as to how you organize your risk reward table, bigger risk bigger reward. It all boils down to luck and when lenders want someone to hedge they want the borrower to follow scenario 2, it does put a ceiling on loss but you pay a premium and CPG did not do that and that is why they are losing so much (or win so much if the luck goes the other way which is not prudent either , its the winning $1000 bet unfortunately)