Put options on crude oil
Crude oil options are the most widely traded energy derivative in the New York Mercantile Exchange NYMEX , one of the largest derivative product markets in the world.
The underlying of these options is not actually crude oil itself, but crude oil futures contracts. Thus, despite their names, crude oil options are, in fact, options on futures. Both American and European types of options are available on NYMEX. American options , which allow the holder to exercise the option at any time over its maturity, are exercised into underlying futures contracts.
Below the table summarizes the American option positions that once exercised results in the respective underlying futures position shown in the second column.
Brent Crude American-style Option | ICE
The European type of oil options are settled in cash. Note that in contrary to American options, European options may only be exercised at the expiration date.
On expiration of a call put option , the value will be the difference between the settlement price of the underlying Crude Oil Futures strike price and the strike price settlement price of the underlying Crude Oil Futures multiplied by 1, barrels, or zero, whichever is greater. Crude oil futures contract units are 1, barrels of crude oil. Traders who seeks downside protection in crude oil trading may want to trade crude oil options that are traded mainly at NYMEX.
Additionally, long option traders do not face margin calls that require the traders to have enough liquidity to support their position. European options are optimal for traders who wish settlement in cash.
External references used in researching this piece: Dictionary Term Of The Day.
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Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. How To Buy Oil Options By Elvin Mirzayev, CFA, FRM Share. Oil options versus Oil futures Options contracts give holders long positions the right but not the obligation to buy or sell the underlying depending on whether the option is call or put. Thus, options have a non-linear risk-return profile that is best for those crude oil traders who prefer downside protection.
The most a crude oil option holder can lose is the cost of the option premium that is paid to the option writer seller. Futures contracts, however, do not give such an opportunity to contract sides, since they a have linear risk and return profile.
iPath S&P GSCI Crude Oil Total Return Index (OIL) Option Chain - Stock Puts & Calls - qoxoxoxiqel.web.fc2.com
Futures traders can lose the entire position during an adverse movement of the underlying price. Traders who do not wish to bother with physical delivery that might require a lot of paper work and complex procedures may prefer oil options to oil futures.
More specifically, European options are cash settled--meaning that once the options are exercised, the option holder receives the positive pay-off in the form of cash. In this case, the delivery and acceptance are not an issue for the contract sides. The crude oil futures traded on NYMEX, however, are physically settled. The trader who has short position on one futures contract must deliver barrels of crude oil at expiration and the long position must accept the delivery.
Where the initial margin requirement of futures is higher than the premium required for the option on similar futures, option positions offer extra leverage by freeing some of the capital required for the initial margin.
However, it is worth noting that the lower price of the options will be reflected in the moneyness of the options. This in turn enables the long option position trader to better sustain price fluctuations without any additional liquidity requirement. The trader must have enough liquidity to support short term price fluctuations.
Long option contracts help to avoid this.
Traders have the opportunity to collect premiums by selling thus assuming high risks crude oil options. If traders do not expect the crude oil prices to strongly change to any direction up or down , oil options create an opportunity for them to earn a profit by writing selling out-of-the-money oil options.
Recall that a short option position collects the premium and assumes the risk. Thus selling out-of-the-money options, be it call or put, will enable them to profit from premium collection should the option end up out-of-the-money.
Futures contracts by nature do not include any upfront payments, therefore they do not offer this type of opportunity for the traders. The Bottom Line Traders who seeks downside protection in crude oil trading may want to trade crude oil options that are traded mainly at NYMEX. Crude oil options are the most widely traded energy derivative in the New York Mercantile Exchange. Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
Crude Oil Options Explained | The Options & Futures Guide
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Crude Oil Options Contract Specs - CME Group
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All Rights Reserved Terms Of Use Privacy Policy. American crude oil option position. After exercise of respective crude oil options.