All the planning in the world cannot help you sell more gallons when Mother Nature does not cooperate. This past winter was unseasonably warm, and while the savings on overtime pay were a plus, making fewer deliveries was less than ideal for your bottom line. When winters are warm, temperatures are what affect your sales. NOT planning, pricing, service or marketing efforts.
There is a way, however, to generate revenue during a warm winter…
Hedging the volume through “option purchases” on the number of heating degree days (HDDs) in your area. Trading via weather derivatives can be an effective way to weatherproof your business.
The math is not complicated:
There is a strike price: In this case, a floor on the number of HDDs
There is a premium: The amount paid for the put option
There is a payout per unit: If there are fewer HDDs than the floor, you get paid a dollar amount per “lost” HDD or a dollar amount per “lost” gallon sold
In a cold winter, the premium paid for the puts options (the floor) would expire without any financial benefit, akin to auto insurance without a claim. On the other hand, if it were cold, you may have sold extra gallons to recoup part, or all, of the premiums paid to hedge against the potentially warm winter.
Hedging against warm weather in the winter is neither free nor speculative. Its purpose is to provide a level of certainty when predictability is precarious. Hedging your sales volume is definitely something that you and your trading advisors should consider.
Angus Partners, LLC (“Angus Energy”) is a registered Commodity Trading Advisor (CTA) and a member of the National Futures Association. When applicable, advice from Angus Energy may include a discussion about risk mitigation via commodity and/or weather hedging.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or to authorize someone else to trade for you, you should be aware that you could lose all or substantially all of your investment and may be liable for amounts well above your initial investment.