Deciphering Crude Oil Options: Understanding Prices and Trading Strategies

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As commodities go, you may have heard all too often about gold as a commodity. However, there is one more commodity, typically volatile and unpredictable as a trading commodity, and this is crude oil. Before understanding crude oil options prices, you should know some aspects of crude oil trading itself.

As a prominent commodity in the commodities markets around the world, crude oil stands to be one of the most actively traded commodities in India. Crude oil is traded in futures and options contracts on the Multi Commodity Exchange (MCX) on a daily basis. In India, approximately 8,500 barrels of crude oil are traded in a day, and with such large volumes being transacted, investors and traders have optimal potential for gains. Many investors stay away from crude oil trading as they fail to understand how the commodity is traded. However, if you grasp some concepts related to this commodity, you may reap the potential advantages of trading in this commodity.

Crude Oil Options Prices and Global Demand

Crude oil stands to be one of the top traded commodities due to its constant global demand. Therefore, any inherent price volatility of this commodity makes it affect the rest of the commodities markets on the international stage. Day traders as well as long-term investors view crude oil trading and investing as a potential way to make gains in their investing activity. Furthermore, crude oil trading takes place with very large volumes, so it offers the added benefit of liquidity in the commodity markets. India and China are the two countries with the greatest degree of consumption of crude oil. Nonetheless, before you jump into crude oil options in trading and investing, it is important to gain basic knowledge of crude oil.

Crude Oil and Crude Oil Trading

Essentially, crude oil is unrefined petroleum that exists in its natural state. This is a fossil fuel that contains deposits of hydrocarbons as well as many organic materials. The popularity of trading in crude oil is basically due to the fact that when the commodity is refined, it produces high-demand fuel such as diesel, kerosene, and gasoline. Furthermore, crude oil demand is seen in the production of fertilisers, plastic, and steel. It is a non-renewable commodity due to which its prices tend to be on the higher side when demand increases.

There are three types of crude oil, and these comprise Brent Crude Oil, West Texas Intermediate (WTI), and Dubai/Oman. The trading of crude oil refers to transactions in crude oil futures and options trading contracts, and this is where crude oil options prices of the commodity matter. In terms of crude oil trading, there is a lot of engagement in speculating about short-term movements in the price of the commodity and in the analysis of the true value of the commodity.

Trading Crude Oil Options

The exchange on which crude oil derivatives contracts are traded is the MCX or the Multi-Commodity Exchange. On this exchange, the commodity’s price is quoted based on the price of one barrel of crude oil. The main crude oil trading contract aspects are shown below:

  • Quoted Price: The rate is per barrel
  • A barrel = 159 Litres
  • Size of the Lot = 100 barrels
  • Size of the tick = ₹1 (the tick size is essentially the minimum change in price between the offer and bid prices)
  • Contracts last for 6 months
  • The expiry of contracts is denoted in the options or futures contracts
  • Delivery units are in the amount of 50,000 barrels and delivery is taken at Mumbai ports in India

Crude Oil Trading Strategies

To make the most of crude oil options prices, you may want to adopt some trading strategies when you trade in options contracts with crude oil. Here are some strategies commonly employed:

Swing Trading

If you are a trader who relies on short-term changes in demand and supply, candlestick charts, and technical analysis to make your trading decisions, you may be a swing trader. These factors can help you determine market trends and you may sell a contract when trends are moving downward, and buy if they are moving upward.

The strategy of “Buy and Hold”

This is possibly the most popular trading and investing strategy where crude oil is concerned. Traders first make an analysis of the demand and supply of the commodity. Then they take calculated positions. In case their estimates ring true, they close their contracts to make profits before the contract expires.

Technical Analysis

Where trading strategies are concerned, this one is employed whether you are trading in crude oil or stocks. Traders base their trading on technical indicators like bar charts, candlesticks, and trading volumes. Technical indicators give traders information on the future price movement of the commodity, helping them to assess the appropriate time to purchase and sell depending on the formation of the candle.

Wrapping Up

Trading in crude oil takes some experience and strategy creation. While undertaking trading in this commodity, it is worth considering that the prices of crude oil are highly volatile in nature. Besides the factors of supply and demand, crude oil prices are impacted by geopolitical variables. Building a robust trading strategy and learning about crude oil trading in detail will help in the preparation for trading in this commodity. 

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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