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Crude oil is an essential commodity and is one of the most widely-traded assets in the world. You can trade on the price of oil using options. Learn more about trading crude oil options contracts and accessing this exciting, fast-moving market.
What are oil options?
Oil options are contracts based on underlying crude oil markets. Usually, the underlying asset is a futures contract, so the price of the crude oil option will be based on this. You can buy or sell these contracts depending on whether you predict the market is going to move up or down.
Crude oil options allow short-term trading on commodities markets. If you trade binary options based on crude oil, the contract duration can be as short as two hours. You can also select contracts that offer fixed risk and have low capital requirements, making them more accessible to a wider range of traders than futures contracts.
Navigating volatility on crude oil markets with options contracts
One of the reasons why crude oil is so widely traded is the amount of opportunities. Oil is closely tied to world events, meaning there can be huge price swings and a great deal of volatility – great for traders who make the correct predictions.
It’s less great if you’re on the wrong side of a price swing, though, which is another reason why limited risk options can be beneficial. With all Nadex options contracts, your losses are limited, giving you control when trading in volatile market conditions.
The oil market has certainly been no stranger to volatile market conditions in 2020. This has largely been due to the coronavirus pandemic cutting demand, while supply also increased as agreed OPEC production cuts were suspended. In March, the US Energy Information Administration (EIA) declared that oil market volatility was at an all-time high.* On April 20, 2020, oil prices went negative for the first time in history. The price of futures contracts for the US benchmark West Texas Intermediate (WTI) fell below zero just a day before it expired, with storage issues driving the price down.
Oil prices have recently began to recover, but it’s far too soon to say whether this will be the end of the turbulence. With lockdowns continuing or being reinstated around the world, and with the travel industry still in flux, it’s difficult to predict what will happen to oil prices in the coming months.
*US Energy Information Administration, March 2020.
What moves the price of oil? Primary factors that affect the price of crude oil
Crude oil prices can change quickly in reaction to news, policies, and economic events, which also affects the prices of the derivatives based on them. Here are some of the key factors that affect the price of oil:
Supply
The Organization of Petroleum Exporting Countries (OPEC) is dominant here. Its influence is largely felt in the oil market, as its control over supply can move prices up or down. In general, if supply is plentiful, oil is a cheaper commodity.
Demand
If oil is in demand, prices tend to be higher, and vice versa. The coronavirus pandemic shows just how closely demand is tied to oil prices – as economies shut down and travel was cut, demand fell, along with oil prices.
Reports
Look out for these reports that can affect the price of oil:
OPEC’s monthly oil report
International energy agency’s monthly market reports
Baker Hughes rig count, released on the last working day of the first week of the month
Weekly inventory data
EIA’s petroleum status report, released on Wednesdays
EIA’s crude oil inventory reports, released on Wednesdays
Hedging and trading
Oil is often traded in the form of derivatives, rather than in its physical form. Some companies with a vested interest, such as those buying fuel, or oil producers themselves, will buy and sell derivatives to hedge against swings. Traders can also help move prices by buying or selling – look out for trends and monitor markets using fundamental indicators and technical indicators.
Trading crude oil options on Nadex
Nadex offers binary options, knock-outs, and call spreads based on crude oil futures. These are some of the benefits of trading crude oil contracts on Nadex:
Low capital requirements. Crude oil contracts at Nadex are much more accessible than futures or traditional options on futures.
Fixed risk. You’ll know your maximum possible profit or loss up front, before you trade.
Multi-directional opportunity. You can buy or sell contracts, meaning there’s the opportunity to profit from markets moving up or down.
Access to volatility. Trade volatility with set parameters – access opportunity without the same risk as futures.
How to trade crude oil knock-outs
Let’s look at an example of how you might trade a crude oil knock-out – the newest crude oil contract type, introduced due to popular demand.
Scenario: it’s the day that the weekly oil inventory data is released – you’ve been watching the markets all morning, and there’s been some movement, but at around 12:15 p.m. there is a big move upward.
You pick a contract with a floor of 38.75 and a ceiling of 43.75. These are in place to protect your profits or limit your losses – very useful when trading in volatile markets.
This would be your maximum possible profit or loss if you bought:
This would be your maximum possible profit or loss if you sold:
Learn more about knock-outs, what they are, and why you should trade them.
Try trading crude oil options for free
Try trading crude oil markets for free with a Nadex demo account. You’ll get $10,000 in virtual funds, so you can explore binary options, knock-outs and call spreads based on the price of oil.
Sign up for your free demo account to get started.