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Re: Oil options

Unread postby Duende » Tue 02 Dec 2008, 17:05:15

Alright, let's see if I learned anything about options on futures:

There are two major axises which determine the contract price. They generally interact in the following way:
As the call price increases, the contract price decreases.
As the time window opens further, the contract price increases.
A high call price paired with a short time window will result in a relatively inexpensive contract price.
A low call price paired with a long time window will result in a relatively expensive contract price.

Also, am I to believe that:
If I sell at the call price, I effectively 'cash out' with the money I started with?
For each $1/barrel over call price x 1000 = payout
Question: What is the 'time element' you referred to earilier, davep?
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Re: Oil options

Unread postby davep » Tue 02 Dec 2008, 17:18:35

$this->bbcode_second_pass_quote('Duende', 'A')lright, let's see if I learned anything about options on futures:

There are two major axises which determine the contract price. They generally interact in the following way:
As the call price increases, the contract price decreases.
As the time window opens further, the contract price increases.
A high call price paired with a short time window will result in a relatively inexpensive contract price.
A low call price paired with a long time window will result in a relatively expensive contract price.

Also, am I to believe that:
If I sell at the call price, I effectively 'cash out' with the money I started with?
For each $1/barrel over call price x 1000 = payout
Question: What is the 'time element' you referred to earilier, davep?


You already answered that:

$this->bbcode_second_pass_quote('', 'A')s the time window opens further, the contract price increases.


i.e. for a given option price, the further you have until the realisation date, the higher the price.

Also, 'If I sell at the call price, I effectively 'cash out' with the money I started with?' is incorrect, because if you have several years (or even months) left, you will still have the extra value of the 'time element'. But this also depends at what price you bought the option.
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Re: Oil options

Unread postby CrudeAwakening » Tue 02 Dec 2008, 19:47:54

$this->bbcode_second_pass_quote('davep', '
')
BTW, does anybody have a link to a crude options implied volatility chart?

Dave, the only one I could find is on the CBOE website:
CBOE OVX
Click on the link at the bottom of the page "Oil VIX historical prices since May 2007".
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Re: Oil options

Unread postby CrudeAwakening » Tue 02 Dec 2008, 20:03:33

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

Sorry, I don't want to make things too complicated. With options, you can sell the option, exercise the option, or let it lapse. If you exercise the option, you end up owning the underlying asset, in this case oil futures. The futures market is best avoided if you are a novice, IMO, as the downside potential is much greater. If the oil price goes against you, you will be asked to stump up with cash to maintain your margin with your broker.

Davep is right - until you feel comfortable with futures, just trade the option.
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Re: Oil options

Unread postby Duende » Tue 02 Dec 2008, 22:12:13

CrudeAwakening wrote:
$this->bbcode_second_pass_quote('', 'W')ith options, you can sell the option, exercise the option, or let it lapse.

What happens if you let it lapse?

Also, generally speaking - what's the WORST thing that can happen when you invest in option futures?
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Re: Oil options

Unread postby CrudeAwakening » Tue 02 Dec 2008, 23:52:30

$this->bbcode_second_pass_quote('Duende', '')$this->bbcode_second_pass_quote('CrudeAwakening', '
')With options, you can sell the option, exercise the option, or let it lapse.

What happens if you let it lapse?

Its tradable value goes to zero, so you lose your premium. This may happen if you bet wrongly and the futures price stays below the strike price of your option.

$this->bbcode_second_pass_quote('', 'A')lso, generally speaking - what's the WORST thing that can happen when you invest in option futures?

You can lose the premium + commissions you paid. But as long as you don't exercise the option, this is the most you can lose buying options. Selling options is another matter. Don't go there.
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Re: Oil options

Unread postby Duende » Wed 03 Dec 2008, 00:06:23

CrudeAwakeningwrote:
$this->bbcode_second_pass_quote('', 'S')elling options is another matter. Don't go there.

Ha. Yeah, I just read about 'short calls' and I saw the phrase "potential loss unlimited". So, yeah, that's not my game.

It looks like I'm interested in 'long calls', based on what I've read. It seems fairly straightforward, though smallpoxgirl brings up some good points about the volatility aspect: I need to make sure I get the timing and combination of factors right. So I've got more homework.

CrudeAwakening wrote:
$this->bbcode_second_pass_quote('', 'Y')ou can lose the premium + commissions you paid.

How much are the commissions generally? Is it a percent of the strike price or the current trading price? Can I contact any broker, or would you is there a "no-brainer" purveyor of options that I should know about?
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Re: Oil options

Unread postby CrudeAwakening » Thu 04 Dec 2008, 19:10:00

$this->bbcode_second_pass_quote('Duende', '
')How much are the commissions generally? Is it a percent of the strike price or the current trading price? Can I contact any broker, or would you is there a "no-brainer" purveyor of options that I should know about?

Sorry, Duende. Can't really help you there. But I would say that commissions are the least of your concerns in deciding whether to trade.

This may be helpful:

Google Book
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Re: Oil options

Unread postby Wahoo » Fri 05 Dec 2008, 00:32:31

Since this is the thread for questions about oil options, I'd love to get some feedback from the experienced traders on this board.

If I buy oil options on the NYMEX, and if the broker that I buy them through goes bankrupt for any reason, am I exposed to risk or loss of claim on those options? If so, is there something I can do to limit the risk, like asking for certificates documenting the options?

I haven't traded options before, but I intend to buy call options sometime in the next month or two. I understand how options work, don't really need any help understanding the principles of the financial instrument itself. However, since I haven't traded options, I'm just worried about the risk of the broker going under because I don't understand how it affects me. I expect that the options are specifically attributable to me, and would survive a dealer bankruptcy, but I'd like to get some feedback from people who know.
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Re: Oil options

Unread postby smallpoxgirl » Fri 05 Dec 2008, 01:10:40

$this->bbcode_second_pass_quote('Wahoo', 'I')f I buy oil options on the NYMEX, and if the broker that I buy them through goes bankrupt for any reason, am I exposed to risk or loss of claim on those options?


Not in any form of bankruptcy that has occurred so far. There is an agency like FDIC that protects brokerage clients called SIPC. The only way you would be exposed to risk is if a widespread collapse of brokers bankrupted SIPC. That's not real likely, and if SIPC were to collapse, NYMEX might not being doing much better. If NYMEX collapses, then there's nobody to pay out your option anyway.

You can transfer your holdings from one broker to another, so if it seemed your broker was in trouble, you could always move to a new broker. With stocks, it's possible to obtain an actual certificate (for a fee) so that you hold the actual stock certificates instead of your broker. I don't think that you can do that with options. Options are an expiring item, so you have to do something with them before the they expire. You have to either exercise them or sell them, and both of those things require a broker.
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Re: Oil options

Unread postby smallpoxgirl » Fri 05 Dec 2008, 01:30:28

Actually, I retract my statement above. Futures are specifically excluded from coverage by SIPC.
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Re: Oil options

Unread postby Wahoo » Fri 05 Dec 2008, 10:08:14

$this->bbcode_second_pass_quote('smallpoxgirl', 'A')ctually, I retract my statement above. Futures are specifically excluded from coverage by SIPC.

That's the kind of thing that makes me nervous. So many previously unthinkable things have happened this year, I get concerned about having a large sum tied up in options, and then having a broker go from healthy to bankrupt in a matter of days and I'm tied up in litigation over options as they slowly move towards their expiration date.

Still, the opportunity to play the volatility in oil is too compelling to pass up. It just occurred to me that the obvious move to mitigate risk is spread the investment over a few of the largest brokers and keep an eye on their health. Even if one fails and I somehow get screwed, it won't be as bad as if I had one broker holding all of the options.
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Re: Oil options

Unread postby davep » Fri 05 Dec 2008, 11:14:13

$this->bbcode_second_pass_quote('Wahoo', '')$this->bbcode_second_pass_quote('smallpoxgirl', 'A')ctually, I retract my statement above. Futures are specifically excluded from coverage by SIPC.

That's the kind of thing that makes me nervous. So many previously unthinkable things have happened this year, I get concerned about having a large sum tied up in options, and then having a broker go from healthy to bankrupt in a matter of days and I'm tied up in litigation over options as they slowly move towards their expiration date.

Still, the opportunity to play the volatility in oil is too compelling to pass up. It just occurred to me that the obvious move to mitigate risk is spread the investment over a few of the largest brokers and keep an eye on their health. Even if one fails and I somehow get screwed, it won't be as bad as if I had one broker holding all of the options.


I think you may be forced to anyway. Optionsxpress won't allow me to spend more than 5k on options. I'm not sure if that's an absolute limit or just for those starting out in the options game.
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Re: Oil options

Unread postby Wahoo » Fri 05 Dec 2008, 16:19:13

Okay, here's a fun little thing I can't figure out.

I have been tracking several different call options and watching the prices drop as the price of oil drops. Every day the price of oil goes down, the price of call options goes down; if oil goes up, the price of the call options goes up.

Until this week. I'm tracking Dec 2012 $150 call options. When oil was at $51-$52, the price of the option was $2,460.

When oil dropped to $49ish, the option went to $2,640.
When oil dropped to $45ish, the option went to $2,760.
As of yesterday, with oil in the $43's, the option was at $2,940.

The price of the December 2012 $150 call option is going up as the price of oil goes down. I have been tracking option pricing for many options over many months, and have never seen that. I have been licking my chops to buy as oil goes down, and the price of that call option (and others I have been watching) is going up.

So I ask you, gentle reader... WHAT THE HELL IS THAT?!
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Re: Oil options

Unread postby MOCKBA » Fri 05 Dec 2008, 17:43:03

$this->bbcode_second_pass_quote('Wahoo', 'S')o I ask you, gentle reader... WHAT THE HELL IS THAT?!

The market for options you've been mentioning are very thin. For thinly traded market last trade price means nothing (and you would never get it, same as you would never get fair value for those options unless you deal in them in the pit). You should look at bid/ask spread and open interest / volume spreads. In any case it is stupid to "invest" in calls that far out. Why not buy close OTM options? If you believe that oil would more then triple (for you to just break even) then you would triple your money or worse come to worse would not loose everything if the price would just double.

There is a reason options that far out cost that little - probability of them expiring in the money are very low.
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Re: Oil options

Unread postby MOCKBA » Fri 05 Dec 2008, 18:05:32

$this->bbcode_second_pass_quote('Wahoo', 'I')f I buy oil options on the NYMEX, and if the broker that I buy them through goes bankrupt for any reason, am I exposed to risk or loss of claim on those options?


Lehman had energy hedging business. When Lehman went under it was a counterparty to some of energy price hedges... Since the bankruptcy energy companies report losses on their exposure to Lehman... otherwise oil above $120 was a sweet time to hedge production at above $100 till the end of the year...

The moral of the story - counterparty risk is a lot higher then the risk of brokerage going under.
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Re: Oil options

Unread postby smallpoxgirl » Fri 05 Dec 2008, 22:16:47

$this->bbcode_second_pass_quote('Wahoo', 'T')hat's the kind of thing that makes me nervous. So many previously unthinkable things have happened this year, I get concerned about having a large sum tied up in options, and then having a broker go from healthy to bankrupt in a matter of days and I'm tied up in litigation over options as they slowly move towards their expiration date.


One way around that would be to buy call options on USO instead. ETF shares are considered equities even if they track to futures so you would have SIPC protection from broker bankruptcy. OTOH, you would incur the counterparty risk of fraud by whoever runs USO.
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Re: Oil options

Unread postby mkwin » Sat 06 Dec 2008, 08:04:46

$this->bbcode_second_pass_quote('Wahoo', 'O')kay, here's a fun little thing I can't figure out.

I have been tracking several different call options and watching the prices drop as the price of oil drops. Every day the price of oil goes down, the price of call options goes down; if oil goes up, the price of the call options goes up.

Until this week. I'm tracking Dec 2012 $150 call options. When oil was at $51-$52, the price of the option was $2,460.

When oil dropped to $49ish, the option went to $2,640.
When oil dropped to $45ish, the option went to $2,760.
As of yesterday, with oil in the $43's, the option was at $2,940.

The price of the December 2012 $150 call option is going up as the price of oil goes down. I have been tracking option pricing for many options over many months, and have never seen that. I have been licking my chops to buy as oil goes down, and the price of that call option (and others I have been watching) is going up.

So I ask you, gentle reader... WHAT THE HELL IS THAT?!


Well the 2012 call option is based on the 2012 futures price not todays price.

Crude Futures Prices

It is currently circa $75.

The only logical explanation is speculators are betting that this drop in prices will mean more projects are mothballed and the supply shortage will be more acute when demand rebounds hence the demand for call options is increasing due to this speculative theory.
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Re: Oil options

Unread postby Wahoo » Mon 08 Dec 2008, 11:08:24

$this->bbcode_second_pass_quote('MOCKBA', 'I')n any case it is stupid to "invest" in calls that far out. Why not buy close OTM options? If you believe that oil would more then triple (for you to just break even) then you would triple your money or worse come to worse would not loose everything if the price would just double.

There is a reason options that far out cost that little - probability of them expiring in the money are very low.

The problem with buying close OTM options is that I would be betting that oil will go up soon. I have no idea if oil will go up or down in the short term.

I want to make a play that assumes oil will go up significantly in the next couple of years. I am comfortable with that assertion, but I am not comfortable spending a dime betting that it will go up in the short term. That's why I'm not considering options that expire soon.

I don't need oil to reach $150 to make money on $150 call options. Imagine that oil goes up above $100 sometime in the next two years based on supply/demand issues, more rampant speculation like we had earlier this year, or a major de-stabilizing event in the Middle East. The price of these $150 December 2012 calls will go up dramatically. If oil hits $120 a barrel sometime in 2010, I bet these options would go to $8,000 - $10,000 per contract. At that point, I could sell contracts to cancel my position and make a pile of money.

It doesn't have to be the Dec 2012 $150 calls. I'm not in love with that contract specifically. I could buy $120's or $200's. The Dec 2012 $200 contract will go up in price if oil jumps to $100 - $120 in the next couple of years. Remember, I don't need oil to hit $200 to make money on the $200 contract. I just need oil to go up enough to have a significant effect on the price of whatever contract I buy.

I just want to make a play that assumes oil will go up significantly in the next few years. I have no confidence in my ability to predict the next 12 months, but am fairly certain that oil will go up big over the next four years or so. Options are a good way to avoid the scary volatility of the market and capitalize on the long-term uptrend from $40 a barrel to something much higher.

Thank you everyone for your helpful insight and answers.
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Re: Oil options

Unread postby vaseline2008 » Mon 08 Dec 2008, 18:36:10

$this->bbcode_second_pass_quote('Wahoo', '')$this->bbcode_second_pass_quote('MOCKBA', 'I')n any case it is stupid to "invest" in calls that far out. Why not buy close OTM options? If you believe that oil would more then triple (for you to just break even) then you would triple your money or worse come to worse would not loose everything if the price would just double.

There is a reason options that far out cost that little - probability of them expiring in the money are very low.

The problem with buying close OTM options is that I would be betting that oil will go up soon. I have no idea if oil will go up or down in the short term.

I want to make a play that assumes oil will go up significantly in the next couple of years. I am comfortable with that assertion, but I am not comfortable spending a dime betting that it will go up in the short term. That's why I'm not considering options that expire soon.

I don't need oil to reach $150 to make money on $150 call options. Imagine that oil goes up above $100 sometime in the next two years based on supply/demand issues, more rampant speculation like we had earlier this year, or a major de-stabilizing event in the Middle East. The price of these $150 December 2012 calls will go up dramatically. If oil hits $120 a barrel sometime in 2010, I bet these options would go to $8,000 - $10,000 per contract. At that point, I could sell contracts to cancel my position and make a pile of money.

It doesn't have to be the Dec 2012 $150 calls. I'm not in love with that contract specifically. I could buy $120's or $200's. The Dec 2012 $200 contract will go up in price if oil jumps to $100 - $120 in the next couple of years. Remember, I don't need oil to hit $200 to make money on the $200 contract. I just need oil to go up enough to have a significant effect on the price of whatever contract I buy.

I just want to make a play that assumes oil will go up significantly in the next few years. I have no confidence in my ability to predict the next 12 months, but am fairly certain that oil will go up big over the next four years or so. Options are a good way to avoid the scary volatility of the market and capitalize on the long-term uptrend from $40 a barrel to something much higher.

Thank you everyone for your helpful insight and answers.


Here's what you can do:

Contango Pays Most in Decade as Shell Stores Crude

$this->bbcode_second_pass_quote('', 'T')raders who bought oil at the $40.81 a barrel on Dec. 5 could sell futures contracts for delivery next December at $54.65, a 34 percent gain. After taking into account storage and financing costs investors would earn about 11 percent, according to Andy Lipow, president of Houston consultant Lipow Oil Associates LLC. The premium, known as contango, is the biggest for a 12-month span of futures since 1998, when a glut drove crude down to $10.

Stockpiling crude may provide higher returns than commodities, stocks and Treasuries as the U.S., Japan and Europe endure simultaneous recessions for the first time since World War II. Crude sank 70 percent in New York since peaking at $147.27 in July. The Standard & Poor’s 500 Index fell 38 percent this year and two-year government notes yield 0.9 percent.

“The bottom line is that you buy crude at a low price and lock in a profit by selling it forward,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It’s low risk. The contango can definitely pay for storage and the cost of capital and leave plenty left over.”
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