- Option trading in the oil market allows hedgers and speculators to gain the right to buy or sell crude futures at a specified price before their options expire.
- The contract holder has extra flexibility because options do not have to be exercised at the expiration date.
- Oil options are available in both American and European kinds, and they trade on the NYMEX, ICE, and CME exchanges in the United States.
Can I buy crude oil options?
You can invest in oil commodities in a variety of ways. Oil can also be purchased by the barrel.
Crude oil is traded as light sweet crude oil futures contracts on the New York Mercantile Exchange and other commodities markets across the world. Futures contracts are agreements to provide a specific quantity of a commodity at a specific price and on a specific date in the future.
Oil options are a different way to purchase oil. The buyer or seller of options contracts has the option to swap oil at a later period. You’ll need to trade futures or options on oil on a commodities market if you want to acquire them directly.
The most frequent approach for the average person to invest in oil is to purchase oil ETF shares.
Finally, indirectly investing in oil through the ownership of several oil firms is an option.
What is the procedure for purchasing crude oil futures?
There are a few different ways to get your hands on crude oil futures. The following are a few of the most common:
- Directly purchase oil futures. The first alternative is to buy and sell oil futures on a commodities exchange directly. The New York Mercantile Exchange (NYMEX) and the Chicago Mercantile Exchange are two of the most well-known (CME or CME Group). You can also use a broker, such as TradeStation, to make your transaction.
- ETFs can be bought and sold. You can invest in oil-related exchange-traded funds if you’d prefer let someone else handle the buying and selling of oil futures while paying minimum costs (ETFs). However, before you acquire a fund, make sure you read the fine print. Some of these funds invest in oil futures and other oil-related derivatives, while others invest in oil producing firms, so you won’t have any direct exposure to physical oil.
There are a few things to bear in mind regardless of how you choose to get into the futures industry:
- Price fluctuations are frequent. Oil futures prices are notorious for their extreme volatility. As a result, it’s critical that you stick to your trading plan, even if that means occasionally accepting a loss – an unpleasant truth that all investors must embrace.
- It’s essential to conduct research on a daily basis. The price of oil is affected by a number of factors, each of which can produce significant price changes on its own. Not only should you conduct daily research, but you should also keep up with the news, not only to keep track of how oil is performing at the present, but also to keep track of the state of geopolitical and economic situations, weather events, and the other elements stated above.
- If you don’t know what you’re doing, don’t use margins. The attraction of the enormous rewards that successful margin trades can give is difficult to ignore as a newbie. You should avoid trading on margin until you are an experienced oil futures trader, no matter how challenging it may be. Sure, there’s the possibility for massive returns, but there’s also the risk of large loses.
What is the value of an oil futures contract?
Crude oil futures contracts have a 0.01 per barrel specification and are worth $10.00 per contract. Sunday through Friday, electronic trading of crude oil futures is performed on the CME Globex trading platform from 6:00 p.m. U.S. to 5:00 p.m. U.S. ET.
What is the best way to short oil futures?
If you’re negative on crude oil, a short position in the crude oil futures market can help you profit from a drop in the price. Selling (shorting) one or more crude oil futures contracts on a futures exchange is one way to do so.
Example: Short Crude Oil Futures Trade
At USD 44.20/barrel, you decide to sell one near-month NYMEX Brent Crude Oil Futures contract. The value of a Brent Crude Oil futures contract is USD 44,200 since each contract represents 1000 barrels of crude oil. You must put up an initial margin of USD 12,825 to initiate the short futures transaction.
The price of crude oil decreases a week later, and the price of NYMEX Brent Crude Oil futures falls to USD 39.78 per barrel as a result. Each contract now only has a value of USD 39,780. So, by closing your futures position now, you can profit USD 4,420 on your short position in Brent Crude Oil Futures.
What is the crude oil futures margin requirement?
The large crude oil contract, with an average daily traded value of Rupees 2500 Cr, is unquestionably one of the most valuable contracts traded on the MCX. Let’s get right to the big crude’s contact information without wasting any time.
Let’s take a closer look at this information. On the MCX, crude oil is traded on a per-barrel basis (one barrel is equal to 42 gallons or about 159 litres). Take a look at the graphic below for an example of Crude Oil Market Depth –
As you can see, the Crude Oil contract expiring on the 19th of December 2016 is trading at Rs.3197/- a barrel, which, as we all know, is a per-barrel price quote.
The lot size is 100 barrels, which indicates that if you wish to buy (or go long) crude oil, the contract’s value will be .
This is the crude oil contract value, but what about the margins? Unlike other commodities, crude oil has a slightly bigger profit margin. The margin needed is around 9% if you want to carry the position forward overnight.
In fact, you can use the margin calculator on Zerodha’s website to receive a quick estimate of how much margin you’ll need. Here’s an example of the same
If the price of Crude is Rs.3,253/-, the margin requirement under NRLM (for an overnight position) is Rs.29,114/-. However, if you want to use MIS to conduct an intraday trade, the margin requirement is around 4.5 percent. As you can see from the screenshot above, the MIS margin is only Rs.14,557/-.
What impact do oil futures have on oil prices?
Oil futures, also known as futures contracts, are agreements to buy or sell oil at a certain price at a specific date in the future. Traders in oil futures make bids on the price of oil based on their expectations for future prices. To decide the price, they look at predicted supply and demand. Traders will raise the price of oil if they believe demand will rise as the global economy expands. Even when there is ample supply, this might result in high oil prices.