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 NameUnderlying Contract SizeExercise StyleOption Price Quotes
NYMEX Heating Oil Options42000 gal
(Full Contract Specs)
AmericanCalls | 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 Futures

Compared 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 Leverage

Compared 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.

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 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

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