Question about commodity trading, specifically light sweet crude?

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Steven Andro Posts:1 2007-01-17 08:15:32	Question about commodity trading, specifically light sweet crude?
I'm thinking about making a play on oil. I'd like to buy some sort of contract betting that the price of oil will be higher by next fall, say Nov or Dec 2007. I'm not sure what would be the best and easiest way for me to make this play. I would like to make an investment like a call option where I only risk the premium. Are there call options on oil? I've found futures contracts on oil but it seems to me that you have an unlimited downside risk with a futures contract? I like the fact that downside is limited with a call option. Any advice or suggestions would be greatly appreciated. So if I were to buy Dec 07 56 for $6. I would basically need the spot price to be 62 in the market come Dec 07 to break even, am I calculating that correctly? Thanks for the help, really hepfully and definitely appreciated. I may call your broker to find out about opening an account.

Steven Andro

Posts:1
2007-01-17 08:15:32

Question about commodity trading, specifically light sweet crude?

I'm thinking about making a play on oil. I'd like to buy some sort of contract betting that the price of oil will be higher by next fall, say Nov or Dec 2007. I'm not sure what would be the best and easiest way for me to make this play. I would like to make an investment like a call option where I only risk the premium. Are there call options on oil? I've found futures contracts on oil but it seems to me that you have an unlimited downside risk with a futures contract? I like the fact that downside is limited with a call option. Any advice or suggestions would be greatly appreciated.
So if I were to buy Dec 07 56 for $6. I would basically need the spot price to be 62 in the market come Dec 07 to break even, am I calculating that correctly?

Thanks for the help, really hepfully and definitely appreciated. I may call your broker to find out about opening an account.

jeffpa Posts:2 2007-01-17 08:39:22
Yes, there are options on crude oil. In fact monthly options, and strike prices every 50 cents. DO NOT DO FUTURES CONTRACTS unless you really know what you are doing. Be aware crude options are ungodly expensive. There are strategies such as going long a call at say 55$ (and lets say a DEC 2007), and then shorting a nearby (say March) 65 call. This way you arent out as much. I cant take the time to explain all the strategies with hedging options(and plus's and minus's), but a good futures broker can. I use Dain Rauscher Futures in Minn Mn, 1-800-888-7885. Addendum: I just checked with Dan, and a December 56 call is 6$ (6,000$). dec crude is trading around 55$. hope this helps.

jeffpa

Posts:2
2007-01-17 08:39:22

Yes, there are options on crude oil.

In fact monthly options, and strike
prices every 50 cents.

DO NOT DO FUTURES CONTRACTS unless
you really know what you are doing.

Be aware crude options are ungodly expensive.

There are strategies such as going long a call
at say 55$ (and lets say a DEC 2007), and then shorting
a nearby (say March) 65 call. This way you arent out
as much.

I cant take the time to explain all the strategies with hedging options(and plus's and minus's), but a good
futures broker can.

I use Dain Rauscher Futures in Minn Mn,
1-800-888-7885.

Addendum: I just checked with Dan, and
a December 56 call is 6$ (6,000$).

dec crude is trading around 55$.

hope this helps.

John K Posts:27 2007-01-17 09:46:30
The choice on whether to use a futures or futures option comes down to how much capital you have to risk, and how you're going to protect your position now that you've decided to favor the bull trend. Picking the position isn't so important as how you manage the position you've put on. You can go long the December Light Crude contract and place a hedge on it by going short. As the price moves up, you can adjust your short hedge to lock in profits, thereby limiting the risk inherent in an unhedged futures position. With options, you can do the same by purchasing your December call option ATM and hedging it with a long December put ATM -- what's referred to as a straddle. If the straddle is too expensive for your tastes, use a strangle and buy your December call and put OTM. However you place your position(s), picking your market and your bias is the easy part. It's management of the trade that's the most difficult, since so many of us are more interested in being right than being profitable. Make sure that you manage your risk by creating hedges for yourself, and stick to strict trading rules that limit your losses. If you've any more specific questions, feel free to contact me at Liverpool Derivatives Group at jkinard@liverpoolgroup.com.

John K

Posts:27
2007-01-17 09:46:30

The choice on whether to use a futures or futures option comes down to how much capital you have to risk, and how you're going to protect your position now that you've decided to favor the bull trend. Picking the position isn't so important as how you manage the position you've put on.

You can go long the December Light Crude contract and place a hedge on it by going short. As the price moves up, you can adjust your short hedge to lock in profits, thereby limiting the risk inherent in an unhedged futures position.

With options, you can do the same by purchasing your December call option ATM and hedging it with a long December put ATM -- what's referred to as a straddle. If the straddle is too expensive for your tastes, use a strangle and buy your December call and put OTM.

However you place your position(s), picking your market and your bias is the easy part. It's management of the trade that's the most difficult, since so many of us are more interested in being right than being profitable. Make sure that you manage your risk by creating hedges for yourself, and stick to strict trading rules that limit your losses.

If you've any more specific questions, feel free to contact me at Liverpool Derivatives Group at jkinard@liverpoolgroup.com.