Saturday, August 24th, 2019

Make Money with Oil Futures Options


Last week we wrote about how you can make money trading options. This week we look at a specific niche that can be very profitable, options on oil futures. First let us look at the difference between futures and options. Then we look at how to combine the two to make money with oil futures options.

Futures versus Options

Futures are standardized contracts between two parties to buy or sell a specified asset of a standardized quantity and quality for an agreed upon price set at the time of making the contract. Both buyer and seller are obligated to satisfy the terms of the contract. On the other hand an options contract gives the buyer the right to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date. And, the buyer is under no obligation to do so. But, the seller is obligated to fulfill the terms of the contract if the buyer decides to execute the same. Futures contract traders often enter and exit trades without remaining in the contract until expiration. The same applies to options trades. A common way to minimize risk in futures trading is to purchase options contracts on futures trades. We suggest that it is possible to minimize risk and make money with oil futures options in today’s markets.

Russian, Ukraine, Crimea and Oil Futures

There are a lot of commodities and stocks for which a trader can buy or sell futures contacts. We are looking at how to make money with oil futures options because of the volatile nature of the oil and gas market today due to the annexation of Crimea by the Russian Federation, the continued attempts by Russia to foment unrest in Eastern Ukraine and the distinct possibility that Russian natural gas and oil will cease to flow through Ukrainian pipelines to the European Union.

Make Money with Oil Futures Options: a snapshot of the market

As of the morning of April 29, 2014, CME crude oil futures quotes are as follows:

Sampling of Data from CME Oil Futures and Oil Futures Options

As of April 29, 2014

Delivery Last in $ Highest Strike Price Cost
June 2014 102.02 103 2.05
July 2014 101.24
August 2014 100.30
September 2014 99.31
October 2014 98.35
November 2014 97.44
December 2014 96.64 98 5.45
December 2015 88.72 91 7.83
December 2016 85.00 87 9.17
December 2017 82.99 85 10.23
December 2018 81.62 84 11.16
December 2019 80.89 83 11.92
December 2020 80.71 83 12.44
December 2021 80.36 82.50 12.83
December 2022 80.42 82.50 13.57

There are three basic factors driving the oil and gas markets today. One is the still weak global economic recovery. This is keeping prices down as demand is lower than before the start of the second worst recession in seventy-five years. Two is the development of sustainable fracking technology which is bringing the USA back the top rank of oil production, greatly reducing US oil imports and likely to make the USA an oil and natural gas exporter. This technology will eventually be worldwide and can be expected to increase production across the board. The third factor is political, social and military unrest in the Middle East and now is Ukraine where Russian natural gas and oil flow to Europe. If the Ukraine crisis sets off another Cold War it could greatly upset the oil markets and drive prices significantly higher. Looking at the futures for crude oil on the Comex traders expect prices to fall over the next several years. However, there is a risk factor here as those selling options are asking for significant premiums in return for guaranteeing low prices six, seven and eight years from now.

How Can You Make Money with Oil Futures Options?

The beauty of options is that buyers assume no risk other than the capital they invest in an options contract. And, options buyers can always exit a contract if it appears to have been a bad idea, thus limiting their loss. On the other hand if things go badly in Ukraine and a trader gas purchased options to buy crude oil futures at a low price the resulting profits could be extraordinary. As always do your own homework and check out any tips with thorough fundamental and technical analysis.

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