Heating Oil Options Explained
Heating Oil options are option contracts in which the underlying asset is a heating oil futures contract.
The holder of a heating oil 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 heating oil futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.
Heating Oil Option Exchanges
Heating Oil option contracts are available for trading at New York Mercantile Exchange (NYMEX).
NYMEX Heating Oil option prices are quoted in dollars and cents per gallon and their underlying futures are traded in lots of 42000 gallons (1000 barrels) of heating oil.
|Exchange & Product Name||Underlying Contract Size||Exercise Style||Option Price Quotes|
|NYMEX Heating Oil Options||42000 gal|
(Full Contract Specs)
|American||Calls | Puts|
Call and Put Options
Options are divided into two classes - calls and puts. Heating Oil call options are purchased by traders who are bullish about heating oil prices. Traders who believe that heating oil prices will fall can buy heating oil 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.
Heating Oil Options vs. Heating Oil FuturesCompared to the outright purchase of the underlying heating oil futures, heating oil 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 LeverageCompared to taking a position on the underlying heating oil futures outright, the buyer of a heating oil option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying heating oil futures.
Limit Potential Losses
As heating oil options only grant the right but not the obligation to assume the underlying heating oil futures position, potential losses are limited to only the premium paid to purchase the option.
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.
Options have a limited lifespan and are subjected to the effects of time decay. The value of a heating oil 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 Heating Oil Futures & Options Trading
- Heating Oil Futures Basics
- Buying Heating Oil Futures to Profit from a Rise in Heating Oil Prices
- Selling Heating Oil Futures to Profit from a Fall in Heating Oil Prices
- Heating Oil Call Option Trading Basics
- Heating Oil Put Option Trading Basics
- Hedging Against Rising Heating Oil Prices with Heating Oil Futures
- Hedging Against Falling Heating Oil Prices with Heating Oil Futures
How to Start Trading Heating Oil Options
To buy or sell heating oil options, you need to open a trading account with a broker that handles futures options trades. Most online brokerages out there only deal with stocks and stock options. Only a few such as TD Ameritrade lets you trade futures and futures options as well. TD Ameritrade also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.