How To Invest In Crude Oil Futures And Options (by MK Smith)

Many people believe that the prices of crude oil futures and unleaded gas futures are too cheap at the current levels for various reasons but do not know how to invest in energy futures and options.

What is a crude oil futures option? A crude oil futures option is the right but not the obligation to buy (call) or sell (put) 1000 barrels of crude oil for a certain price (strike price) by a certain period of time (expiration date). The option buyer pays a premium for this right. A hypothetical example might be buying 1 June $65 crude oil futures call option for a premium cost of $1000. Keep in mind that premium cost does not include commissions and any related fees. The premium paid and the commissions and fees are the maximum risk of capital loss that an option purchaser might sustain. The person speculating on this particular crude oil futures call option is hoping for the price of June crude oil futures to increase enough for them to sell (offset) the option for a profit anytime before the option expires.

There are various futures contracts that are closely related to crude oil futures because they are made from crude oil such as heating oil futures and unleaded gas futures. An unleaded gas futures option gives the option buyer the right but not the obligation to buy (call) or sell (put) 42,000 gallons of unleaded gas for a certain price (strike) by a certain period of time (expiration date). A hypothetical example might be buying 1 July $1.80 unleaded gas futures call option for $900. Once again, the premium cost does not include commissions and fees. The premium paid and the commissions and fees are the maximum risk of capital loss that an option purchaser might sustain. The option speculator is hoping for the price of July unleaded gas futures to increase enough for them to sell (offset) their option for a profit anytime before the option expiration date.

Crude oil futures options and unleaded gas futures options investing are very risky and are not suitable for all investors. Buying options can lead to the loss of the entire amount invested.

Why are crude oil futures contract prices quoted in barrels and heating oil futures and unleaded gas futures contracts are quoted in gallons? One barrel of crude oil is 42 gallons so the contracts are actually leveraging the same amount of petroleum or the products. It is less confusing to have different contract quotes for the distillates of crude oil and the crude oil itself.

The author of this article has 13 plus years of commodity option trading experience and wishes to educate investors so they can make prudent investment decisions based on a deeper knowledge of the option markets before they risk their hard earned money. Future option trading is not for everyone and only risk capital should be used when investing. Visit http://www.tkfutures.com/education.htm to learn more.