Buying Heating Oil Put Options to Profit from a Fall in Heating Oil Prices

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Contents

Buying Heating Oil Put Options to Profit from a Fall in Heating Oil Prices

If you are bearish on heating oil, you can profit from a fall in heating oil price by buying (going long) heating oil put options.

Example: Long Heating Oil Put Option

You observed that the near-month NYMEX Heating Oil futures contract is trading at the price of USD 1.4777 per gallon. A NYMEX Heating Oil put option with the same expiration month and a nearby strike price of USD 1.5000 is being priced at USD 0.1000/gal. Since each underlying NYMEX Heating Oil futures contract represents 42,000 gallons of heating oil, the premium you need to pay to own the put option is USD 4,200.

Assuming that by option expiration day, the price of the underlying heating oil futures has fallen by 15% and is now trading at USD 1.2560 per gallon. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying heating oil futures at the strike price of USD 1.5000. In other words, it also means that you get to sell 42,000 gallons of heating oil at USD 1.5000/gal on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying heating oil futures at the market price of USD 1.2560 per gallon, resulting in a gain of USD 0.2440/gal. Since each NYMEX Heating Oil put option covers 42,000 gallons of heating oil, gain from the long put position is USD 10,248. Deducting the initial premium of USD 4,200 you paid to purchase the put option, your net profit from the long put strategy will come to USD 6,048.

Long Heating Oil Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (USD 1.5000/gal – USD 1.2560/gal) x 42000 gal
= USD 10,248
Investment = Initial Premium Paid
= USD 4,200
Net Profit = Gain from Option Exercise – Investment
= USD 10,248 – USD 4,200
= USD 6,048
Return on Investment = 144%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the heating oil option sale will be equal to it’s intrinsic value.

Learn More About Heating Oil Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

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  • Binomo
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Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying Crude Oil Put Options to Profit from a Fall in Crude Oil Prices

If you are bearish on crude oil, you can profit from a fall in crude oil price by buying (going long) crude oil put options.

Example: Long Crude Oil Put Option

You observed that the near-month NYMEX Light Sweet Crude Oil futures contract is trading at the price of USD 40.30 per barrel. A NYMEX Crude Oil put option with the same expiration month and a nearby strike price of USD 40.00 is being priced at USD 2.6900/barrel. Since each underlying NYMEX Light Sweet Crude Oil futures contract represents 1,000 barrels of crude oil, the premium you need to pay to own the put option is USD 2,690.

Assuming that by option expiration day, the price of the underlying crude oil futures has fallen by 15% and is now trading at USD 34.25 per barrel. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying crude oil futures at the strike price of USD 40.00. In other words, it also means that you get to sell 1,000 barrels of crude oil at USD 40.00/barrel on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying crude oil futures at the market price of USD 34.26 per barrel, resulting in a gain of USD 5.7500/barrel. Since each NYMEX Light Sweet Crude Oil put option covers 1,000 barrels of crude oil, gain from the long put position is USD 5,750. Deducting the initial premium of USD 2,690 you paid to purchase the put option, your net profit from the long put strategy will come to USD 3,060.

Long Crude Oil Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (USD 40.00/barrel – USD 34.25/barrel) x 1000 barrel
= USD 5,750
Investment = Initial Premium Paid
= USD 2,690
Net Profit = Gain from Option Exercise – Investment
= USD 5,750 – USD 2,690
= USD 3,060
Return on Investment = 114%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the crude oil option sale will be equal to it’s intrinsic value.

Learn More About Crude Oil Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

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    Binarium

    Top Binary Options Broker 2020!
    Best Choice For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

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