A Crude Oil Hedging Lesson From Mattress Mack - $85 and It's Free

If you live in Houston or you've spent much time here, you're certainly familiar with Jim "Mattress Mack" McIngvale, the owner of Gallery Furniture. If you're not familiar with him, Mattress Mack is a Houston celebrity, well known for the energetic commercials which advertise his furniture stores. His entertaining commercials generally include some variant of one of his catch phrases - "save you money" or "buy it today and have it in your home tonight". 

In recent years, he's run some interesting promotions related to sports. For example, last year he offered full refunds to customers who spent $6,300 or more if the Houston Astros won at least 63 games during the season, a promotion which led to refunds of approximately $4 million. He also ran a "Pigskin Promotion" during the Superbowl last year, offering Gallery Furniture customers who bought at least $6,000 of furniture by Superbowl Sunday, the chance to receive a full refund if the Seattle Seahawks won the game. As a result of the Seahawks win, about 1,000 customers reportedly received refunds equating to around $7 million.

On Friday, Mack launched "the biggest promotion in Gallery Furniture history". Although this time, rather than sports, he has tied the promotion to the price of WTI crude oil futures. Why WTI crude oil? According to the Gallery Furniture website:

Everyone knows how important oil is to the Houston area economy. Everyone from construction to retail depends on how well the energy industry prospers. The better energy does, the better we all benefit.

Mattress Mack wants to do his part to boost our local economy by giving away Free Furniture to customers if the price of West Texas Intermediate Crude tops $85 per barrel at year's end. That's right, if you purchase $7,000 or more of furniture or mattresses from Gallery Furniture, Mack will give you back 100% of your purchase amount if oil prices go up!

If you've followed Mack's previous promotions over past year or so, you know customers always win. This could be your chance to win free furniture! The good news is that if you win, so does the entire Houston economy.

So what does Mack's new promotion have to do with crude oil hedging? While we don't know whether Mack has hedged his promotion, he could certainly do so. In effect, the promotion equates to a short position in a February $85 European (exercise on a single day) NYMEX WTI crude oil call option with an expiration date of December 31, 2015. As a result, to hedge his promotion he could simply by the appropriate number of call options which will offset the company's sales that are eligible for the potential refund. Alternatively, he might be able to purchase an insurance policy which acts as a look-a-like to the call option, as is often done with promotions such as hole-in-one contests.

Given that the February '15 WTI futures contract (which will be the prompt contract on December 31, 2015) is currently trading in the $56/BBL range, his "trade" is safe for the moment but who knows where it will be trading at the end of the year. Regardless of the outcome, Mack has certainly created the intended buzz as most local media outlets have covered the story i.e. New Mattress Mack Challenge Might Singlehandedly Boost Oil Price.