In October 2014, prices for WTI oil were more than $90 a barrel. By December, prices were below $60 a barrel. A price not seen before 2010. What was more incredible, the price for oil kept falling. Last month, the price of oil fell below $44 a barrel.
Recently oil traders are seeing extremely large daily moves up and down. For example, last week futures traders watched oil prices fall 8.7 percent on Wednesday after they had risen 7 percent on Tuesday!
If traders want to capitalize on this market volatility, they could trade options as an alternative to trading oil futures contracts. The benefit of buying options is the ability to take a position without getting stopped-out due to high volatility.
Please refer to my lessons on The Call Option and The Put Option for buy option basics.
Understanding WTI Oil Buy Call Options
Let’s start by showing you an image of a WTI Oil Buy Call trade:
Take a close look at the trade, what do you see? What comprises the WTI Oil Buy Call trade above? Here is a quick breakdown:
1. Underlying Asset – The financial instrument upon which the option’s price is derived. In the example above, WTI OIL is the underlying asset.
2. Strike Rate - The agreed sell/buy price available to an option holder (buyer). The strike rate at +0% is at-the-money (ATM).
3. Amount – How much the holder invests in the transaction (the higher the amount, the higher the risk). This is amount above states 100, which is 100 option contracts (which contain 1000 barrels of oil each).
4. Expiry – The last day the option is valid before it expires. If I opened this trade on February 10th, it would only be valid until its expiry on February 17th (7 days).
5. Premium - When buying an option, you pay a premium - the ‘open premium’. Whilst you hold an option, the premium value changes depending on changes in the underlying market.
In the chart below, you can see your “Premium at expiry” if you traded this option. There will only be a payout if the strike rate is below the underlying market rate.
Payout/premium is calculated by taking the difference between rates and multiplying it to the amount of the transaction.
Premium at expiry = (Market rate – Strike rate) * Amount of transaction
Example = (57.01 – 52.06) * 100 = 495 USD
I have purposely blanked out several of the fields in the scenario graph above to help you practice calculating your profit/loss at expiry. Here is a grid for you to fill-in the missing Profit/Loss numbers based on the scenario chart above:
*Notice in the table above how the “Premium at open” is a negative value. It is because the amount was debited from your free balance to pay for the option.
To get you started in your calculations, let me give you the formula!
Premium at open + Premium at expiry = Profit/Loss
Still want a hint to get you started?
For Rate 55.36, -165.04 + 330.08 = 165.04
Now, it’s your turn! Calculate the remaining Profit/Loss at expiry for this WTI Oil Buy Call option.
The content provided is made available to you by ORE Tech Ltd for educational purposes only, and does not constitute any recommendation and/or proposal regarding the performance and/or avoidance of any transaction (whether financial or not), and does not provide or intend to provide any basis of assumption and/or reliance to any such transaction.
Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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