So let’s talk about how to trade options a bit. Most people that trade options think that trading them on stocks is the only way to go. In fact, you can trade options on a lot of different asset classes. In this short article and video we are going to chat about trading crude oil options.
Crude Oil Options vs. Crude Oil Futures
Compared to the outright purchase of the underlying crude oil futures, crude oil options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless. I personally like trading crude oil options because it tends to be less stress, for me.
Compared to taking a position on the underlying crude oil futures outright, the buyer of a crude oil option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying crude oil futures.
Limit Potential Losses
As crude oil options only grant the right, but not the obligation to assume the underlying crude oil futures position, potential losses are limited to only the premium paid to purchase the option.
Using options alone, or in combination with futures, lets you structure trades differently. Let me give an example. Let’s say you are a crude oil day trader – you trade the futures contracts. If you have traded crude oil futures you know how fast they can move. So, say you purchase one crude oil option (call) you can hold that and scalp the crude oil futures around it.
Pros & Cons
So look, there are cons to this as well, as with all products. The cons are that there is time decay in the crude oil options. That happens with all options trading so you have to understand how that operates. For me, I understand the price charts and fundamentals of this market so it usually lets me understand the time decay.
The pros? There’s a lot. If you have ever traded crude oil futures and struggle cause they move to fast these tend to help. The downside to them is, they don’t move dollar for dollar like the futures contracts do, but really, who cares as long as you are making money.
Watch the video below – I explain them in a short detail with a real trade.