Gasoline Options Explained

Gasoline options are option contracts in which the underlying asset is a gasoline futures contract.

The holder of a gasoline option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying gasoline futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Gasoline Option Exchanges

Gasoline option contracts are available for trading at New York Mercantile Exchange (NYMEX).

NYMEX Gasoline option prices are quoted in dollars and cents per gallon and their underlying futures are traded in lots of 42000 gallons (1000 barrels) of gasoline.

Exchange & Product NameUnderlying Contract SizeExercise StyleOption Price Quotes
NYMEX Gasoline Options42000 gal
(Full Contract Specs)
AmericanCalls | Puts

Call and Put Options

Options are divided into two classes - calls and puts. Gasoline call options are purchased by traders who are bullish about gasoline prices. Traders who believe that gasoline prices will fall can buy gasoline put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Gasoline Options vs. Gasoline Futures

Compared to the outright purchase of the underlying gasoline futures, gasoline options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless.

Additional Leverage

Compared to taking a position on the underlying gasoline futures outright, the buyer of a gasoline option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying gasoline futures.

Limit Potential Losses

As gasoline options only grant the right but not the obligation to assume the underlying gasoline futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a gasoline option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Gasoline Futures & Options Trading

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