What are Crude Oil Options on Futures?

NYMEX Light Sweet Crude Oil futures options are among the most actively-traded options on futures products. A derivative of Crude Oil futures, these options contracts offer distinct advantages for traders such as added leverage and the ability to hedge against possible losses.

Additionally, with many options trading strategies available both long and short, Crude Oil options on futures provide flexibility for traders looking to diversify their trading approach.

Crude Oil Options Market

Often referred to as Crude Oil options, the prices of these contracts are quoted in US dollars per barrel.

There are 4 main factors which influence the price of Crude Oil options:

• The price of the underlying Crude Oil futures contract
• Time value also called tenor or duration
• Market volatility
• Interest rates

The most critical variable determining the price of a Crude Oil option is the relationship between the underlying Crude Oil futures contract and the strike price of the option. The interplay between the price of Crude Oil futures and the strike price of the option determines whether the option is at-the-money, in-the-money, or out-of-the-money. The strike price is the price at which a futures option can be bought or sold.

4 Ways to Trade Crude Oil Options

Derivatives of derivatives, Crude Oil options on futures present 4 unique ways to speculate the Crude Oil futures market. Two types of options are available, call options and put options, both of which can be traded on either the long or short side.

• Buy call options: Similar to putting a down payment towards a purchase, buying calls grants the owner the right to buy Crude Oil futures at a locked-in price before a specified date.
• Sell call options: When selling call options, you sell the right but not obligation to buy the underlying Crude Oil futures market at a set price before a specified date.
• Buy put options: Comparable to buying an insurance policy to protect your assets, buying put options grants owners the right to sell the underlying Crude Oil futures market at an agreed price before the option’s expiration date.
• Sell put options: Put sellers anticipate a rise in the value of Crude Oil futures and sell put options in exchange for the options premium.

Please note: Speculative trading of Crude Oil options involves substantial risk. When trading leveraged securities such as options on futures, traders should be aware of the possibility of losing investment capital and should manage their exposure accordingly.

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