Simple way to make long term bet on oil

November 26, 2008 4:54 PM

Can anyone explain this website which shows the prices of crude oil options?

I'm hoping someone can explain this website for me.

I'd like to know how much it costs to buy an options contract for crude oil for the long term. For example, I buy the option to buy a 1000 barrels of oil at 70 dollars a barrel in 2012. How much would it cost to be able to do this?

If anyone knows of any other simple ways to make a long term bet on crude oil, apart from DXO which I've already looked at, feel free to add suggestions.

posted by fantasticninety to grab bag (5 comments total)

Well, the chart you have linked to is for crude oil futures, not crude oil options. Futures are an obligation to exchange a commodity or cash equivalent at a future date - they only have a single price. Options are the right but not the obligation to do so at a specified price, known as the strike price. As a result options have many prices, known as the premium. The premium varies by strike price, for example if you want to buy an option to buy (known as a call) at a strike of 50 it will cost more than an option to buy at a strike of 100. I think what you should probably do is look into the basics of commodity options trading, there isn't much special about energy products on top of that.

If you want to know how many contracts you'd need to buy look up the contract specification for crude oil options, probably somewhere on the CME or NYMEX sites. I believe 1 lot is 1000 barrels, so you would want to trade a single lot.
posted by true at 5:23 PM on November 26, 2008

It's important to note that if you hold an oil future too long, you have oil. If you hold an option too long, you have nothing. I'm not sure which is worse, but it takes a relatively monied and sophisticated investor to realize profits in either instrument.

Investopedia has a description of "Qualified Eligable Participant" that is a relevant guideline here.
posted by pwnguin at 7:08 PM on November 26, 2008

Buying DXO compared to buying 2012 options on futures is not remotely close to the same thing in terms of the kind of risk and leverage, and liquidity, so it seems reasonable to suggest that a very popular and much simpler way to bet on the future price of oil is to buy stock in oil companies that have big reserves of the stuff. Some good value out there. Comes with a whole different set of risks of course.
posted by sfenders at 3:25 AM on November 27, 2008

For a minimum of what you'd need to know about options, start with the greeks.
posted by sfenders at 5:16 AM on November 27, 2008

The answer to your question is on this NYMEX page (you may have to click through an agreement to get to it):

To buy an american-style call option on light sweet crude for delivery in Dec 2011 with a strike price of $70.00, you will pay roughly $16.45 per contract. Go down the table and you'll see how the price varies as you get "out of the money."

To make a long term bet you could do a few things:

a) invest directly in long-dated oil futures
b) buy financial futures or invest in a commodity index (the GSCI for example)
c) invest in electronically traded funds such as USO
e) purchase stock of major oil producers
d) buy call options on of any of the above

Your choice will depend on how much money you have, what kind of risk/reward you want to take, and other factors. For example, option D will likely give you the most leverage but you'll probably pay the highest commission.
posted by bloggboy at 9:54 AM on November 27, 2008