Trade Options

The crude oil options are defined as option contracts that have the crude oil futures contract as the underlying asset. The trader that holds the crude options have the right to hold a long position or a short position, as the case may be with regard to the call and the put option, in the underlying asset which in this case in the crude oil futures, at the strike price. Here it is important to mention that the trader possesses the right but is not under any obligation to take the position at the strike price on the expiration date. However when on the expiration date the market closes, this right ceases to exist as the option expires.

Crude Oil Option Exchanges

The NYMEX or the New York Mercantile Exchange is the exchange where the trading for the crude options contracts is available. Lots of 1000 barrels is the parameter under the NYMEX Light Sweet Crude Oil’s futures is traded and the option prices for each barrel are quoted in dollars and cents. The same applies to the NYMEX Brent Crude Oil too.

Types of options

The options are divided into two categories, the call and the put. The call options are for those traders that believe that the crude oil prices would rise in the future. On the other hand, the traders that are bearish on the crude oil prices in the future can buy the crude oil put options. The way to trade crude options is not limited to buying calls and puts, but there are many additional strategies of option trading like the spreads are also used to buy and sell crude options.

Advantages of trading crude options over crude oil futures

There are many advantages for traders that trade crude options over the purchase of crude oil futures. These advantages are listed as follows:

1. Additional leverage: one of the advantages of trading crude options over straight- away taking a position in the crude oil futures is that the buyer has additional leverage. This is because when the margin requirement that is needed to open a position in the crude futures is compared with the premium that is payable on the crude options, the latter is generally lower than the former.

2. flexibility: trading crude options, in combination with futures or alone is anyway more flexible since many strategies can be developed and implemented to cater to many factors like cost consideration, risk management, volatility and time of investment.

3. Limited losses: the crude oil options give the traders the right to take positions without any obligation to buy. This feature safeguards the trader from losing any additional money and his loss is limited to the tune of the premium paid for the purchase of the option.

With these advantages in place, it is anyway beneficial to trade crude options. However, as with all trading activities, prudence and patience must be observed to gain profits. In case of doubts, one should not hesitate to seek expert advice.