[Duende]

So, I'm sure many of you've seen that the economy tanked again today, along with the price of oil. It's under $50 again!

I have read elsewhere on the board about options trading in oil. The premise, as well as I can understand it, is that if I were to invest a sum of money now - say, around $3,700 - then I could 'control' around 75 of barrels of oil. Let's say then that oil goes up to $150 next summer. I could then sell my option of 75 barrels of oil for $150 each, coming away with around $11,250, minus fees, etc.

However, if oil falls further - let's say to $20 per barrel - then, by the end of the option timeline, I'd have to sell it for that price: 75 barrels at $20 each = $1,500, for a total loss of around $2,200.

Is there anything I'm missing or have wrong? Also, where could I look to find information on doing this? Thanks.

[davep]

$this->bbcode_second_pass_quote('Duende', 'S')o, I'm sure many of you've seen that the economy tanked again today, along with the price of oil. It's under $50 again!

I have read elsewhere on the board about options trading in oil. The premise, as well as I can understand it, is that if I were to invest a sum of money now - say, around $3,700 - then I could 'control' around 75 of barrels of oil. Let's say then that oil goes up to $150 next summer. I could then sell my option of 75 barrels of oil for $150 each, coming away with around $11,250, minus fees, etc.

However, if oil falls further - let's say to $20 per barrel - then, by the end of the option timeline, I'd have to sell it for that price: 75 barrels at $20 each = $1,500, for a total loss of around $2,200.

Is there anything I'm missing or have wrong? Also, where could I look to find information on doing this? Thanks.

[Duende]

davep wrote:
$this->bbcode_second_pass_quote('', 'I')f you're into trading oil options, your minimum bet is 1000 barrels.

With 3700 dollars you could 'control' 1000 barrels at 150/barrel (or possibly 140 at the moment) for five years hence.

[davep]

$this->bbcode_second_pass_quote('Duende', '[')b]davep wrote:
$this->bbcode_second_pass_quote('', 'I')f you're into trading oil options, your minimum bet is 1000 barrels.

With 3700 dollars you could 'control' 1000 barrels at 150/barrel (or possibly 140 at the moment) for five years hence.

[Duende]

davep wrote:
$this->bbcode_second_pass_quote('', 'W')ith 3700 dollars you could 'control' 1000 barrels at 150/barrel (or possibly 140 at the moment) for five years hence.

[smallpoxgirl]

Lets back up a couple of steps.

There's a couple of ways to invest in oil.

The most direct and most traditional is futures. Futures behave a lot like what you described. You buy a futures contract and place down some margin. If the price goes up, the value of your contract goes up. If the price goes down the value of your contract goes down. If it goes down below you margin requirement, then you're required to front more money. The biggest problem with trading futures is that the smallest futures contract is 500 barrels. For a lot of people, that's more risk than they can/should take.

The other vehicle that you can reasonably use to invest in oil, is ETF shares. USO is an ETF that invests strictly in oil futures. One share of USO has about the same leverage as 0.8 barrels of oil. For smaller traders it can be a much more reasonable way of tracking oil. The most prominent down side with USO is that ETF's trade during market hours, typically 8:00 am to 6pm eastern if you include the electronic after-market trading. Because the futures trade around the clock, you expose yourself to the possibility of things moving adversely against you in the middle of the night when you can't close your position. The other down side to investing in USO is that you're not getting nearly as much leverage as you would with futures.

Options are a separate thing that can be traded on either futures or ETF shares. When you buy a call option contract on USO shares, you are buying the right to buy shares of USO, by a certain date, at a pre-arranged price. If the price of oil (and USO) goes up, you can excercise your option and get shares of USO on the cheap, or you can just turn around and sell your option and pocket the profit. If the price goes down, you can just let the option expire and lose your purchase price, or you can sell the option before that happens and try to recoup part of your loss. Options trading is really complicated. I'd highly advise doing a bunch of reading, and paper trading with them for a while before jumping in. I was trading USO options for a while. It worked ok, but I ended up deciding that I was devoting far too many brain cells to trying to figure out which option to buy and I am far better off devoting that energy to analyzing the market and trying to decide when to get in and when to get out.

[davep]

$this->bbcode_second_pass_quote('Duende', '[')b]davep wrote:
$this->bbcode_second_pass_quote('', 'W')ith 3700 dollars you could 'control' 1000 barrels at 150/barrel (or possibly 140 at the moment) for five years hence.

[Duende]

Thanks smallpoxgirl. Very thorough explanation.

smallpoxgirl wrote:
$this->bbcode_second_pass_quote('', 'O')ne share of USO has about the same leverage as 0.8 barrels of oil.

[Duende]

davep wrote:
$this->bbcode_second_pass_quote('', '.')..so in a falling market when the hedge funds are shitting themselves and trying to de-leverage, option prices will fall more than is rational.

[davep]

$this->bbcode_second_pass_quote('Duende', '[')b]davep wrote:
$this->bbcode_second_pass_quote('', '.')..so in a falling market when the hedge funds are shitting themselves and trying to de-leverage, option prices will fall more than is rational.

[smallpoxgirl]

$this->bbcode_second_pass_quote('Duende', 'O')k. Is USO/ETF similar to options, where you have a minimum purchase amount?

[smallpoxgirl]

$this->bbcode_second_pass_quote('Duende', '[')b]davep wrote:
$this->bbcode_second_pass_quote('', '.')..so in a falling market when the hedge funds are shitting themselves and trying to de-leverage, option prices will fall more than is rational.

[mkwin]

$this->bbcode_second_pass_quote('Duende', '[')b]davep wrote:
$this->bbcode_second_pass_quote('', '.')..so in a falling market when the hedge funds are shitting themselves and trying to de-leverage, option prices will fall more than is rational.

[Duende]

mkwin wrote:
$this->bbcode_second_pass_quote('', 'Y')ou are slightly confused about options.

[smallpoxgirl]

$this->bbcode_second_pass_quote('Duende', 'I')f I wait until the VIX settles down a bit, don't I risk the chance that the oil price per barrel will have risen (presumably with the market)? Or, is it possible that the VIX will settle down at the same time the market remains down?

[vision-master]

$this->bbcode_second_pass_quote('Duende', 'S')o, I'm sure many of you've seen that the economy tanked again today, along with the price of oil. It's under $50 again!

I have read elsewhere on the board about options trading in oil. The premise, as well as I can understand it, is that if I were to invest a sum of money now - say, around $3,700 - then I could 'control' around 75 of barrels of oil. Let's say then that oil goes up to $150 next summer. I could then sell my option of 75 barrels of oil for $150 each, coming away with around $11,250, minus fees, etc.

However, if oil falls further - let's say to $20 per barrel - then, by the end of the option timeline, I'd have to sell it for that price: 75 barrels at $20 each = $1,500, for a total loss of around $2,200.

Is there anything I'm missing or have wrong? Also, where could I look to find information on doing this? Thanks.

[Duende]

vision-master wrote:
$this->bbcode_second_pass_quote('', 'W')hy not invest in a substainable future instead?

[CrudeAwakening]

Don't forget, in buying long-dated options, you're also betting on the continued existence of the oil exchange. Probably (?) a safe bet, but who knows what may happen in the future.

If you think oil is heading to Simmons territory, and the dollar is heading for a fall, buying call options on futures seems a relatively straightforward way of hedging against these things. All you can lose is your premium (plus commissions). But I think you should go into it with the expectation that you will probably lose your money, not that "PO will make me rich".

Also, with options on futures, if you choose to exercise your option, it means taking a position in the futures market. Not so nervewracking if you exercise close to expiry, but you will be subject to margin calls etc until you are able to offset your futures contract.

There is an oil volatility index called the OVX, which is a counterpart of the VIX. As I understand it, while the VIX is negatively correlated to the S&P, the OVX seems to have been increasing regardless of oil prices.

[Duende]

CrudeAwakening wrote:
$this->bbcode_second_pass_quote('', 'B')ut I think you should go into it with the expectation that you will probably lose your money, not that "PO will make me rich".

[davep]

$this->bbcode_second_pass_quote('Duende', 'T')his part is sort of lost on me. Can you explain a little further about margin calls?