Oil futures options are options contracts where the underlying asset is a crude oil futures contract. The owner of the contract has the right, but not necessarily the obligation to take a long position – a call option – or a short position – a put option – in the underlying crude oil futures at the agreed upon price. When the option expires, this right will end following the market close on the date of the expiration.
These oil futures options contracts are obtainable for trading at the NYMEX (New York Mercantile Exchange). New York Mercantile Exchange Light Sweet Crude Oil option prices are given in US dollars and cents per barrel and their underlying futures are traded in lots of 1000 barrels (42000 gallons) of crude oil.
New York Mercantile Exchange Brent Crude Oil options prices are also quoted in US dollars and cents per barrel, and have contract sizes of 1000 barrels (42000 gallons).
Oil Futures Options: Calls and Puts
Options are divided up into two categories – calls and puts. Oil futures options call options are bought by investors who are bullish concerning the price of crude oil. Investors who predict that the price of crude oil prices will decline can instead purchase oil futures put options.
Purchasing calls or puts isn’t the only way to trade oil futures options. Selling options is also a favorite strategy utilized by many professional option traders. There are also more complicated option trading strategies, referred to as spreads, that can be created by buying and selling options at the same time.
Crude Oil Futures Vs. Oil Futures Options
In comparison to the purchasing the underlying crude oil futures outright, oil futures options provide advantages such as the ability to limit potential losses as well as additional leverage. They are, however, assets that have the possibility of expiring worth nothing.
Additional Leverage, Limit Potential Losses, Flexibility
Compared to taking a position on the underlying crude oil futures outright, the buyer of an oil futures option has added leverage due to the fact that the premium payable is usually less than the marginrequirement that is required to open an options position in the underlying crude oil futures.
Possible losses are restricted to only the premium paid to buy the option, as oil futures options only grant the right – not the obligation – to acquire the underlying crude oil futures position.
A wide variety of strategies can be employed to provide for specific risk-tolerances, time frame for investment, price consideration and underlying volatility forecast, using options alone, or in conjunction with futures.
Limited Life Spans Increases Risk
Because options have a limited lifespan, they are subject to the effects of time decay. The worth of an oil futures option, specifically the time value, becomes less as time goes on.
This time decay can be turned into an asset if an investor chooses to become a seller of oil futures options in lieu of purchasing them.
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