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How to Buy Oil Options
The oil market is often very volatile. Crisis in the Middle East, turmoil in Ukraine and rebellion in Nigeria all threaten to drive oil prices up. Fracking technology is driving the USA toward not only oil and gas independence but a renewed status as an exporter. This fact promises to drive oil prices down. A viable way to deal with the volatility of the oil market is trading oil options. We have written about analysis and strategy in relation to trading options on oil stocks, oil exploration companies and options on oil futures. Now, as a practical matter we talk about just how to buy oil options.
Options on What
As noted above you can profit from price movement of big oil stocks, oil exploration stocks and oil futures. How to buy oil options is pretty similar no matter which way you go. In the USA, traders trade futures on the NYMEX. Traders trade options on the CBOE, the Chicago Board Options Exchange. Big oil stocks and oil exploration stocks trade on the NYSE. Today we will look at how to buy oil options on oil futures using the CBOE.
Chicago Board Options Exchange: CME Group
In this article we are interested in options on futures contracts, specifically crude oil futures. According to Investopedia:
An option on a futures contract gives the holder the right to enter into a specified futures contract. If the option is exercised, the initial holder of the option would enter into the long side of the contract and would buy the underlying asset at the futures price. A short option on a futures contract lets an investor enter into a futures contract as the short who would be required to sell the underlying asset on the future date at the specified price.