Options to Hedge Your Rising Expenses from Inflation

Commodities Investing, Options
by Ryan Zeldin

Inflation is hitting all of us pretty hard.

The cost of living is rapidly increasing—most notably, we have seen gas prices increase substantially over the last year. While gas prices are the headline, consumers are being hit with rising costs everywhere. Food, rents, housing prices, gas prices, heating oil. It’s everywhere. That list doesn’t even include what interest rates have done this year.

Just looking at year to date:

Coffee +47%

Wheat +61%

Orange Juice +44%

Sugar +12%

Cheese +44%

This is another reason why the capital markets are so great. They are NOT just a vehicle for investments in companies. You can use tradeable securities to hedge or gain exposure to any number of areas.

A lot of us are at the point at which we literally cannot take further price increases in staple items that we use daily. I want to discuss today a legitimate way to hedge inflation running even further out of control.

I’m looking at Invesco DB Commodity Index Tracking Fund (DBC). This ETF holds a basket of 14 different commodity futures. Heating oil, coffee, crude oil, wheat, sugar… you name it, they have it. This ETF is up 50% already this year as commodities have soared!

Buying call options on this ETF is a very prudent way to hedge further inflation pressures moving forward.

I’m looking at buying the Oct 33/40 call spread for $0.90 (Reference DBC 30.04). I’m getting a $7 wide call spread for $.90 of upfront cost. If DBC moves higher by another 33% between now and the October expiration, I will make almost 7x my initial investment.

DBC has already moved 50% this year; therefore, this type of move is NOT unprecedented or unrealistic. If DBC continues higher, you are going to be very happy that you hedged some of your personal inflation risk. If inflation cools off, sending DBC lower, you will receive a huge benefit in your personal spending as prices retreat.

This type of strategy is a real-world application of how investment vehicles can work in your everyday life. Buying options can provide tremendous leverage to help achieve your goals, whether it be through gaining exposure or hedging a wide variety of scenarios.

Author: Ryan ZeldinRyan Zeldin has spent the last 20+ years trading a plethora of derivatives with a focus on equity options. Ryan spent the first decade of his career as a market maker on the floor of the CBOE. Ryan spent three years trading options on the QQQ (Nasdaq 100 ETF) and 8 years trading SPX (S&P 500). Ryan managed a multi-million dollar book consisting of futures and options managing risk during unprecedented volatility. The last 12 years, Ryan has been the lead derivative analyst at a $75 billion asset manager. Ryan has recommended, executed and managed the positions for a variety of funds, including a global multi asset allocation fund that was a heavy user of a variety of strategies focusing on equity index options. In his free time, Ryan enjoys playing golf and other sports, but mostly watching his four kids play their sports. And, obviously, Ryan is extremely passionate about capital markets and all things trading.