You'd need to buy puts at $70 for NYMEX crude and would pay to do so. The basic hedge for producers is to pick a price floor that preserves your economics, price up the cost of that put and then sell a call option at something like $90 to offset the cost of the put - costless collar.Sporty Spice said:
How do hedge prices usually compare to the strip? For example, if today's strip is showing $70/bbl next year, would I be able to execute a hedge today at $70/bbl with maybe a slight discount for 2024?
The problem is that there's a skew between the floor set by the put and the ceiling set by the call. It's not symmetric. And the most cost efficient way to set a collar is to do it financially, which leaves the producer at risk for locational basis, quality basis and more importantly index premium to swap financial barrels for physical barrels. And there are collateral costs, transaction costs. The banks always set up that heads they win, tails you lose.
