How to hedge your gasoline purchases like the pros

It's possible to hedge your gasoline purchases next year by buying shares of the Unites States Gasoline Fund (UGA).  The United States Gasoline Fund® LP (UGA) is an exchange-traded security that is designed to track in percentage terms the movements of gasoline prices.

Here is how to hedge your gasoline prices.

 UGA shares to buy = (Your annual miles driven / your vehicles miles per gallon) / UGA share price x your local gas price per gallon

Example:

# of gallons of gas used in a year = 20,000 miles / 20 miles per gallon = 1,000 gallons

UGA shares to purchase to hedge one year of gasoline = 1,000 gallons / $57 share price for UGA x $3.11 per gallon = 54.561 or 55 shares

So,

1,000 gallons / year x $3.11 / gallon = $3,110.00

54.561 UGA shares x $57 per share = $3109.98

Your gasoline is hedged at $3.11 for one year.

If gasoline prices go up, your UGA shares will increase and offset your rising costs with shares being sold as needed.

Please note the hedge is not perfect and relies on UGA being highly correlated to gas prices and ignores transaction costs.  In addition, if gasoline prices don't rise as expected you could incur a loss.  But, the probability of gas prices not rising above where they are today is low in my opinion.