Puts or Calls on Oil Futures
by InvestingTips on May 09, 2012
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Puts or Calls on Oil Futures
Is it time for puts or calls on oil futures? Oil futures options reacted to a recent fall in futures prices. At issue is continued global recovery or a slowdown and even a double dip recession. The US labor market is growing but slower than necessary to keep up with population growth. In the last two months fewer than 200,000 jobs have been created each month according to government statistics. This is a dramatic fall from the more than 200,000 figures previously. The sovereign debt dilemma in Europe continues to plague markets. Both France and Greece recently elected socialist leaders in what appears to have been a referendum on policies to stimulate the economy, pay debts, and create jobs. The strict austerity measures instituted across the board in Europe have threatened to cause a recession later this year. The Euro Zone is second only to the USA in size of its economy. Thus any options trader considering puts or calls on oil futures must look at the effects of a European recession on oil prices.
Benchmark crude futures were selling at around $110 a barrel just three months ago. Now benchmark crude trades in the $97 to $98 range. Anyone who purchased puts on oil futures three months ago has done well. Now, the question is if crude prices will continue to fall or if a rebound will make it smart to buy calls on crude oil futures. Purchasing a put on oil futures gives the buyer the right to sell oil futures specified in the contract at the contract price any time up until the end of his options contract. This can be profitable if the price of oil falls. Because the trader is under no obligation to sell if the oil futures price does not react as expected his potential losses are limited to the price of the contract. Purchasing a call on oil futures gives the buyer the right to buy oil futures specified in the contract at the contract price any time up until the end of his options contract. This can be profitable if the price of oil rises. Because he is under no obligation to sell if the oil futures price does not react as expect his potential losses are limited to the price of the contract. Either puts or calls on oil futures may be profitable depending on where the economy goes.
The Euro Zone situation seems to be driving everything these days. United States manufacturing is in its 35 th month of expansion. Every times the ongoing growth of US manufacturing is reported the markets go up and oil prices inch higher. Then the news from Europe drives prices down again. What is best now, puts or calls on oil futures? The most recent issue from Europe is the uncertainty over whether new socialist governments will be able to stimulate their economies, increase employment, and solve the debt crisis. If they are unsuccessful the debt crisis will worsen, unemployment will rise, and the European Union could fall apart.
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