|American crude oil option position||After exercise of respective crude oil options|
|long predict choice|| long futures
Reading: How To Buy Oil Options
long put option
Short call option
Short put choice
case with American Calls
For case, let ’ s assume that on Sept. 27, 2021, a trader named Helen bought American-style call options on April 2022 unrefined vegetable oil futures. The options strike price is $ 90 per barrel. On Nov. 1, 2021, the April 2022 futures price is $ 96 per barrel ; Helen wants to exerwcise her call options. By exercising the options, she enters into a long April 2022 futures position at the locked-in price of $ 90. She may choose to wait until passing and take the delivery of physical crude oil underlying the futures condense, or else cheeseparing the futures position immediately to lock in $ 6 ( $ 96 – $ 90 ) per barrel. Considering the contract size on one blunt oil choice is 1,000 barrels, the $ 6 per barrel would be multiplied by 1000, yielding a $ 6,000 return from the stead .
exemplar with european Calls
European-style vegetable oil options are settled in cash. note that, in contrast with American-style options, European-style options may only be exercised on the termination date. On the exhalation of an in-the-money call option, its rate will be the difference between the colony price of the underlie crude petroleum futures and the option strike price multiplied by 1,000 barrels. conversely, an in-the-money place option will be worth the remainder between the option come to price and the fundamental futures settlement price, multiplied by 1,000, at termination .
For case, assume that on Sept. 27, 2021, trader Helen buys European-style address options on April 2022 petroleum anoint futures at a hit price of $ 95 per barrel, and that the option costs $ 3.10 per barrel. Crude oil futures compress units are 1,000 barrels of crude oil. On Nov. 1, 2021, the April 2022 unrefined anoint futures price is $ 100 per barrel and Helen wishes to exercise the options. once she does this, she receives ( $ 100 – $ 95 ) *1000 = $ 5,000 as payoff on the choice. To calculate the net profit for the position, we need to subtract the cost of options ( the option agio paid to the seller ) of $ 3,100 ( $ 3.1*1000 ). thus, the net profit on the option placement is $ 1,900 ( $ 5,000 – $ 3,100 ).
How To Buy Oil Options
vegetable oil Options Vs. Oil Futures
Options contracts give purchasers the right, but not the obligation, to buy ( call option ) or sell ( put option ) the underlying asset at a preset strike price. The most a crude vegetable oil choice holder can lose is the cost paid for the option, quite than the cost of the underlying futures compress. Futures contracts require more capital for a given flat of exposure relative to options and do not have options ‘ asymmetrical come back characteristics .
anoint options do not require physical delivery at termination, as is the case with some ( but not all ) crude oil futures contracts. European-style vegetable oil options are cash settled, providing cash payouts to holders of in-the-money options at passing. In contrast, crude anoint futures traded on the NYMEX want pitch at passing. The trader short-change one futures sign must deliver 1,000 barrels of blunt oil at the specify delivery point, while those with a farseeing position must accept rescue .
Where the initial margin prerequisite of futures is higher than the premium required for the option on a comparable exposure, option positions provide more leverage. For model, imagine that NYMEX requires $ 2,400 as an initial margin for one crude oil futures contract that has 1,000 barrels of blunt vegetable oil as the implicit in asset. An option on that futures contract might cost $ 1.20 per barrel. A trader considering those alternatives could buy two oil option contracts that would cost precisely $ 2,400 ( 2* $ 1.20*1,000 ) and represent 2,000 barrels of crude oil. It is worth noting, however, that the implicit in leverage of options will be reflected in the option price .
In contrast to crude oil futures, the long call/put petroleum oil options are not margin positions ; therefore, they do not require any initial or alimony margin, and would not trigger a allowance call. This helps the retentive option military position trader wait out price fluctuations. The futures trader may need to provide extra capital should their margined positions lose respect. hanker option contracts help to avoid this .
Traders have the opportunity to collect premiums by selling petroleum oil options ( and assuming the inherently much higher risk of short option positions ). For traders who expect rangebound prices, crude vegetable oil options can provide an opportunity to earn a premium by writing ( selling ) out-of-the-money options. Recall that a short choice position collects the bounty and assumes the risk. Selling out-of-the-money options, be they calls or puts, may enable the seller to retain the premium should the option expire out-of-the-money. Futures contracts do not provide a similar opportunity.
The Bottom Line
Traders who seek to increase leverage or secure an asymmetrical return profile may choose to trade crude oil options on the NYMEX or another switch over. In return for a premium paid upfront, oil choice holders obtain a non-linear risk/return profile not available in futures contracts. additionally, long options traders do not face margin calls that might require future traders to provide extra margin capital for a devalue position. European-style options are optimum for traders who prefer cash settlements .