[avo]

Is anyone here knowledgable enough to discuss the pros and cons of oil futures vs call options on oil futures?

Thanks,
Avo

[tdrive]

If you buy oil futures, you are exposed to a two-sided risk, up or down, and you have to settle in cash every day (mark to market). Actually when moving upward you are making money, so that is not really a risk from a lay point of view. You do not need any initial money though (actually you do for the margin, but this is your money in a way, mark-to-market not withstanding). If the contract ends higher (even a little bit) that the entry price, you make money, else if it is down you lose money (pay cash to close it, or face physical delivery).

If you buy call options on futures though, and the option expires worthless, you lose all the money you paid, but no more, this way you are not exposed to downward risk, and end up making money if the option ends up in the money, assuming that the futures price for that contract was higher than the time value of the option you paid when you bought it.

Hope this is simple enough for you, I tried to be as lay as possible.
If I were you I would trade on paper for a few months before putting any real money, based on the question you ask, and initially expect to lose all money. Never risk anything more you are willing to lose, think of it going to Vegas, except the rules of the game are much more complicated and there is no fun when losing money. And no free drinks, either.

Cheers,

[MicroHydro]

Done in the old fashioned way, as a price hedge for commodity purchase, the risk of futures is zero. If I purchase 1000 barrels of oil to be delivered December 2011, I will own them, and have already fixed the price. If I intend to use the oil, how many dollars 1000 barrels of oil turn out to be worth in 2011 is irrelevant.

If I don't want to take delivery of my oil in December 2011, I can sell my oil then for whatever it is worth at the time. That might turn out to be a long term financial loss or gain. Most peak oilers believe that the dollar cost of oil will go up by December 2011. If you believe the peak oil story, this is putting your money where your belief is.

If you wish to get cute, and frequently buy and sell futures on a short term speculative basis, you must beat the pros in the pits with market timing. Good luck. This is the equivalent of day trading, and we know how that turned out. Almost all retail futures speculators lose money, even in a bull market.

Options are gambling with a big house cut. For example, if you buy put and call options with the same expiration date, one of them might pay off, but you will have a net loss in almost every case. It is worse than playing the slots. On the other hand, writing options can be profitable, but is beyond the scope of retail speculators.

[BAM]

The killer with options is time.
I won't try to explain, but if you're interested go to www.cbot.com and download their option training software, it will help you understand the pros and cons of option trading.

[tdrive]

$this->bbcode_second_pass_quote('', 'A')lmost all retail futures speculators lose money, even in a bull market.

[turmoil]

$this->bbcode_second_pass_quote('tdrive', ' ')(pay cash to close it, or face physical delivery).

[avo]

Thanks for the replies. I'm beginning to get my head around the issues here.

I have no intention of frequent trading; I would buy futures as far out as possible, or a call option on those futures, and hold them to maturity (or until the price goes way up, and I am fearful of a subsequent fall in price).

If I understand correctly, the call option would limit my downside risk, at the cost of the price of the option.

I'm still trying to figure out if this risk limitation is worth the price.

Avo

[fossil_fuel]

go with options. with options, you can only lose what you invest if it doesn't work out. with futures, if the deal goes sour, your ass is toast (at least financially)

of course, futures have a greater potential reward, but IMO it isn't worth the downside risk.

if you find a good commodities broker with low initial investment requirements let me know, i'm looking for one....

[avo]

$this->bbcode_second_pass_quote('fossil_fuel', 'g')o with options. with options, you can only lose what you invest if it doesn't work out. with futures, if the deal goes sour, your ass is toast (at least financially)

[Jaymax]

One thing to consider with futures...

Because of the daily settlement, and access to the (hopefully) profit - it means you can use the profits to pay off interest bearing debt, which might be relevant to you...

I like that my mortgage is almost gone, but I've also still got my long-dated contracts.

--J