Southwest Pays Approx $51 USD A Barrel

On May 29, 7:32 am, Robert Cohen <robtco...@msn.com> wrote:
> Why the other airplines, trucking companies, etal don't do it: Je ne
> sais pas.

it costs a premium to buy futures and lock down rates. if oil prices
don't rise significantly, then you would lose money buying futures.

More details on this subject can be found in the article in the Wall Street
Journal dated May 28, 2008 entitled "Why Rivals Don't Copy Southwest's
Hedging". A couple of pertinent points is that they have hedged more than
70% of its jet-fuel requirements this year at a price equivalent to $51 a
barrel for crude oil. As a comparison, other big carriers have hedged 30%
or less of their fuel needs this year. "Southwest's longest-dated hedge,
covering more than 15% of its fuel needs in 2012 at about $63 a barrel, was
lined up about a year ago."

On May 30, 1:17 am, bucky3 <buc...@mail.com> wrote:
> On May 29, 7:32 am, Robert Cohen <robtco...@msn.com> wrote:
>
> > Why the other airplines, trucking companies, etal don't do it: Je ne
> > sais pas.
>
> it costs a premium to buy futures and lock down rates. if oil prices
> don't rise significantly, then you would lose money buying futures.

Let's not confuse futures, forwards and options, shall we. What SWA
has are a combination of swaps and call options, not futures or
forwards. The airline is not in the oil speculation business but
rather has hedged its exposure to price fluctations. Option calls are
like insurance policies - futures and forwards are investments with
risk. Swaps are a derivation on the theme and again act like
insurance policies, not risky investments.

al

On May 30, 2:04 pm, allan.san...m wrote:
> On May 30, 1:17 am, bucky3 <buc...@mail.com> wrote:
>
> > On May 29, 7:32 am, Robert Cohen <robtco...@msn.com> wrote:
>
> > > Why the other airplines, trucking companies, etal don't do it: Je ne
> > > sais pas.
>
> > it costs a premium to buy futures and lock down rates. if oil prices
> > don't rise significantly, then you would lose money buying futures.
>
> Let's not confuse futures, forwards and options, shall we.  What SWA
> has are a combination of swaps and call options, not futures or
> forwards.  The airline is not in the oil speculation business but
> rather has hedged its exposure to price fluctations.  Option calls are
> like insurance policies - futures and forwards are investments with
> risk.  Swaps are a derivation on the theme and again act like
> insurance policies, not risky investments.
>
> al

I understand call and put options.

The premiums are the prices of options.

Give me an idea or estimate of how much in premiums the airline spends
or risks.

Can the other companies do similarly (thru 3rd parties or however they
trade)?

I agree that an option is not as risky as a futures contract, though
there are also several (complex to me) strategies or tactics in
hedging or "playing" options.

On May 30, 11:23 am, Robert Cohen <robtco...@msn.com> wrote:
> On May 30, 2:04 pm, allan.san...m wrote:
>
>
>
> > On May 30, 1:17 am, bucky3 <buc...@mail.com> wrote:
>
> > > On May 29, 7:32 am, Robert Cohen <robtco...@msn.com> wrote:
>
> > > > Why the other airplines, trucking companies, etal don't do it: Je ne
> > > > sais pas.
>
> > > it costs a premium to buy futures and lock down rates. if oil prices
> > > don't rise significantly, then you would lose money buying futures.
>
> > Let's not confuse futures, forwards and options, shall we. What SWA
> > has are a combination of swaps and call options, not futures or
> > forwards. The airline is not in the oil speculation business but
> > rather has hedged its exposure to price fluctations. Option calls are
> > like insurance policies - futures and forwards are investments with
> > risk. Swaps are a derivation on the theme and again act like
> > insurance policies, not risky investments.
>
> > al
>
> I understand call and put options.
>
> The premiums are the prices of options.

There are no "premiums" for futures contracts.

> Give me an idea or estimate of how much in premiums the airline spends
> or risks.

They risk nothing - that is the value of an option over a future or
forward contract. It's no different than any other insurance a
company may purchase. I have no idea what SWA spends for these
options but I imagine if you wanted to calculate the value you could
by looking in their 10K or annuals and doing a little math.

> Can the other companies do similarly (thru 3rd parties or however they
> trade)?
>
> I agree that an option is not as risky as a futures contract, though
> there are also several (complex to me) strategies or tactics in
> hedging or "playing" options.

There is no risk to an option unless you are playing in the
derivatives market and trading them. There is a known cost to the
option and a firm date and strike price that does not change
regardless of what the market does.

As I said earlier - SWA is NOT in the business of playing in the
futures market - and most large commercial companies aren't either. A
hedge with a call option is a risk reduction strategy, not an
investment strategy for companies (outside of financial firms, of
course).

al

On May 30, 3:24 pm, allan.san...m wrote:
> On May 30, 11:23 am, Robert Cohen <robtco...@msn.com> wrote:
>
>
>
>
>
> > On May 30, 2:04 pm, allan.san...m wrote:
>
> > > On May 30, 1:17 am, bucky3 <buc...@mail.com> wrote:
>
> > > > On May 29, 7:32 am, Robert Cohen <robtco...@msn.com> wrote:
>
> > > > > Why the other airplines, trucking companies, etal don't do it: Je ne
> > > > > sais pas.
>
> > > > it costs a premium to buy futures and lock down rates. if oil prices
> > > > don't rise significantly, then you would lose money buying futures.
>
> > > Let's not confuse futures, forwards and options, shall we.  What SWA
> > > has are a combination of swaps and call options, not futures or
> > > forwards.  The airline is not in the oil speculation business but
> > > rather has hedged its exposure to price fluctations.  Option calls are
> > > like insurance policies - futures and forwards are investments with
> > > risk.  Swaps are a derivation on the theme and again act like
> > > insurance policies, not risky investments.
>
> > > al
>
> > I understand call and put options.
>
> > The premiums are the prices of options.
>
> There are no "premiums" for futures contracts.
>
> > Give me an idea or estimate of how much in premiums the airline spends
> > or risks.
>
> They risk nothing - that is the value of an option over a future or
> forward contract.  It's no different than any other insurance a
> company may purchase.  I have no idea what SWA spends for these
> options but I imagine if you wanted to calculate the value you could
> by looking in their 10K or annuals and doing a little math.
>
> > Can the other companies do similarly (thru 3rd parties or however they
> > trade)?
>
> > I agree that an option is not  as risky as a futures contract, though
> > there are also several (complex to me) strategies or tactics in
> > hedging or "playing"  options.
>
> There is no risk to an option unless you are playing in the
> derivatives market and trading them.  There is a known cost to the
> option and a firm date and strike price that does not change
> regardless of what the market does.
>
> As I said earlier - SWA is NOT in the business of playing in the
> futures market - and most large commercial companies aren't either.  A
> hedge with a call option is a risk reduction strategy, not an
> investment strategy for companies (outside of financial firms, of
> course).
>
> al- Hide quoted text -
>
> - Show quoted text -

I bought a London coffee call option in the early 1970s, and later
trained as a broker with the same broker and also another broker
before that.

I luckily made a few bucks on my call option, though fishing for
prospects didn't do well for me.

I am no salesman nor cogent trader.

A JOURNAL OF COMMECE subscription was how I followed my call option
back then--not a computer.

It was a premium of approx $700 for one call option.

I was lucky that Brazil had a freeze in the coming summer months
(winter months down there--yeah it's confusing to me too.)

One may buy a "call option" or buy a "put option." of coffee, sugar,
oil etal.

The "premium" is the fee for the option.

If SW spent a million dollars for their futures margins and options
premiums in 2007, then that would be considered it's "risk," albeit I
suppose
options are "less risky" than futures contracts directly..

Surely the other companies will be interested in protecting themselves
too, since it has apparently done well for SW.

One can buy and/or sell options and futures contracts in the various
commodities.

It takes skilled commodities traders to play the games well.

The traders-players utilize bits of information, statistics, reports
and other intelligence about their markets.

They do "spreads" and and other exotic tricks or derivative tactics in
the option & futures games to try to minimize their losses and
maximize their wins.

On May 30, 8:06 pm, Robert Cohen <robtco...@msn.com> wrote:
> On May 30, 3:24 pm, allan.san...m wrote:
>
>
>
> > On May 30, 11:23 am, Robert Cohen <robtco...@msn.com> wrote:
>
> > > On May 30, 2:04 pm, allan.san...m wrote:
>
> > > > On May 30, 1:17 am, bucky3 <buc...@mail.com> wrote:
>
> > > > > On May 29, 7:32 am, Robert Cohen <robtco...@msn.com> wrote:
>
> > > > > > Why the other airplines, trucking companies, etal don't do it: Je ne
> > > > > > sais pas.
>
> > > > > it costs a premium to buy futures and lock down rates. if oil prices
> > > > > don't rise significantly, then you would lose money buying futures.
>
> > > > Let's not confuse futures, forwards and options, shall we. What SWA
> > > > has are a combination of swaps and call options, not futures or
> > > > forwards. The airline is not in the oil speculation business but
> > > > rather has hedged its exposure to price fluctations. Option calls are
> > > > like insurance policies - futures and forwards are investments with
> > > > risk. Swaps are a derivation on the theme and again act like
> > > > insurance policies, not risky investments.
>
> > > > al
>
> > > I understand call and put options.
>
> > > The premiums are the prices of options.
>
> > There are no "premiums" for futures contracts.
>
> > > Give me an idea or estimate of how much in premiums the airline spends
> > > or risks.
>
> > They risk nothing - that is the value of an option over a future or
> > forward contract. It's no different than any other insurance a
> > company may purchase. I have no idea what SWA spends for these
> > options but I imagine if you wanted to calculate the value you could
> > by looking in their 10K or annuals and doing a little math.
>
> > > Can the other companies do similarly (thru 3rd parties or however they
> > > trade)?
>
> > > I agree that an option is not as risky as a futures contract, though
> > > there are also several (complex to me) strategies or tactics in
> > > hedging or "playing" options.
>
> > There is no risk to an option unless you are playing in the
> > derivatives market and trading them. There is a known cost to the
> > option and a firm date and strike price that does not change
> > regardless of what the market does.
>
> > As I said earlier - SWA is NOT in the business of playing in the
> > futures market - and most large commercial companies aren't either. A
> > hedge with a call option is a risk reduction strategy, not an
> > investment strategy for companies (outside of financial firms, of
> > course).
>
> > al- Hide quoted text -
>
> > - Show quoted text -
>
> I bought a London coffee call option in the early 1970s, and later
> trained as a broker with the same broker and also another broker
> before that.
>
> I luckily made a few bucks on my call option, though fishing for
> prospects didn't do well for me.
>
> I am no salesman nor cogent trader.
>
> A JOURNAL OF COMMECE subscription was how I followed my call option
> back then--not a computer.
>
> It was a premium of approx $700 for one call option.
>
> I was lucky that Brazil had a freeze in the coming summer months
> (winter months down there--yeah it's confusing to me too.)
>
> One may buy a "call option" or buy a "put option." of coffee, sugar,
> oil etal.
>
> The "premium" is the fee for the option.
>
> If SW spent a million dollars for their futures margins and options
> premiums in 2007, then that would be considered it's "risk," albeit I
> suppose
> options are "less risky" than futures contracts directly..
>
> Surely the other companies will be interested in protecting themselves
> too, since it has apparently done well for SW.
>
> One can buy and/or sell options and futures contracts in the various
> commodities.
>
> It takes skilled commodities traders to play the games well.
>
> The traders-players utilize bits of information, statistics, reports
> and other intelligence about their markets.
>
> They do "spreads" and and other exotic tricks or derivative tactics in
> the option & futures games to try to minimize their losses and
> maximize their wins.

SWA is not in the business of derivatives. They purchased an
insurance policy for a fee to lock in the price of a barrel of oil
(actually it really was likely Jet A-1). This effectively eliminated
the risk of price changes in the future. This is what a call option
is. They did not invest in futures, they did not trade option-based
derivatives, they did not play at forwards - they simply capped there
upside price risk through insurance.

The key is that the only cost to do this is the premium. The price,
time, and cost are all known. In the absence of any uncertainty - all
is known - there is NO risk. This would not be the case for a future
or forward contract.

I am happy to hear that you are the consummate trader but SWA is not.
They fly airplanes, they do not do spreads, exotic tricks, or future
games as an investment strategy. If you go to their annual report,
you will see, in the detailed tables, the cost of risk reduction.

al