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Learn About Crude Oil Futures



November 04, 2010 – Comments (0)

Crude oi is one important kind of commodities. Therefore, a real asset that can be traded through exchange houses through futures contracts, exchange traded notes, royalty trusts, and oil and gas exploration companies. Sometimes we talk about energies terms to mention about crude oil. Trading crude oil is not so hard. However, we need to learn about crude oil before we may start trading.


Crude Oil was first discovered in the US over 150 years ago in 1859.  At the start of the 20th century it supplied only 4% of the world’s energy.  Today that number has significantly increased to 40%, with the downright domination of the transportation market at 96%. We may learn or review some terms of a crude oil futures option.  This refers to the right, but not the obligation to sell (put) or buy (call) 1000 barrels of crude oil for a certain future strike price.

Crude futures began trading on the NYMEX in 1983 and are now one of the most heavily traded commodities in the world.  Futures, by definition mean that you’re trading the price of oil months into the future at a later date.  Traders speculate that the price in the future will be higher or lower.  Crude futures trade 30 consecutive months plus long-dated futures initially listed 36, 48, 60, 72, and 84 months prior to delivery.  Crude Futures trade in units of 1,000 U.S. barrels (42,000 gallons). Options: One NYMEX Division light, sweet crude oil futures contract.  Trading terminates at the close of business on the third business day prior to the 25th calendar day of the month preceeding the delivery month. If the 25th calendar day of the month is a non-business day, trading shall cease on the third business day prior to the last business day preceeding the 25th calendar day.  This is why it is called futures.  Using March, we would trade the spot month April contract until the 3rd business day prior to the 25th of March.  When the April contract would expire and then the next spot month would be May, and so on.  If you have a position on at the end of expiration in that current contract then you have to either make or take delivery.  This is the process where you could accept delivery if you are long or send delivery to the buyer if you are short.  This rarely happens as 90% of oil futures trades are closed out before delivery.

The Crude futures pit was developed mainly for the producers of the commodity to hedge themselves against their own inventory.  Throw in a bunch of speculators to liquefy the market and you have a trading pit with brokers shouting out buy and sell signals.  Over the past two years this market has become solely electronic.  They now have computer programs where at the click of a button you can execute a trade right from your own home.

Therefore, trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.

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