Monday, May 25th, 2020

How to Buy Options on Oil


How to buy options on oil has become an important question as political discontent rises in Libya, Egypt, Yemen, and other points across North Africa and the Middle East. One possibility is to buy options on oil futures and the other is buy options on oil stocks. How to buy options on oil producing companies will be different from how to buy options on oil support companies and how to buy options on oil itself. The problem could be one of short supply due to interrupted production, refining, and shipping. How to trade futures options on oil will have a lot to do with the news going forward. The important news will not be limited to headlines going forward but the often hard to find details.

Companies involved in support for drilling, maintaining wells, and the like need to see to the security of their personnel. Currently medical personnel working for a number of companies are putting paramedics on standby for possible extraction operations from Libya. Many of these personnel are US and British Army trained with combat experience in Iraq and Afghanistan. The concern is that armored convoys may need to extract personnel and materials. Much of the oil in Libya is in the eastern desert adjacent to Egypt from where land extraction efforts might way occur. The rationale is that Muammar Qaddafi, the Libyan strong man who is currently employing violent means to put down demonstration has purposely kept his militia weak over the years to avoid a coup d’état. As such he may not have sufficient strength when, as expected, the several tribes that comprise Libya rise up individually or separately. If this happens there will be several power centers in the country with no clear path back to a functioning central government. That would not spell disaster for Libyan oil production but also for the health and safety for any foreign workers stranded in the Libyan Desert. For those looking at this situation from the outside the question will be how to buy options on oil and profit from any disruption in oil production and flow that may stem from current events in Libya and elsewhere. How to trade stock options as relates to this situation will start with learning who is doing business in Libya and who stands to lose in a civil war.

The political unrest in North Africa threatens to move beyond this region. Yemenis have asked their long term leader to consider stepping down and peaceful demonstrations in Cairo resulted in the resignations of Hosni Mubarak, the 30 year leader of that country. The example of one strongman being forced out seems to have encouraged Libyans to demonstrate. Unfortunately their leader did not follow the example of the Egyptian military by largely staying out of the fight and helping broker a peaceful transition. As such we may see both peaceful and violent resolution of a number of political conflicts in the region. How to buy options on oil and oil futures and do so successfully will have a lot to do with following the news and developing a deeper understanding of how events are likely to unfold. Trading oil options always has to do with supply and demand. In this case, however, it is not about exploration, new oil finds, or how the state of the economy drives demand. It is about human events and the desire of people to have a greater say in how they are governed. In such cases, options trading gives the investor or trader the ability to reduce risk in trading as the only risk is the premium paid for the call or put option.

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