complete noob question, how to trade oil futures

G

ggelitetrader000

Hello all, I have done only stock and options trading, but after lot of dropping of oil futures with headlines last few months, it appears the price of oil has bottomed out. I would like to ride some gain if there is any. One thing is to buy dilapidated stocks of oil company however i am also interested in buying some oil futures. I dont know where to start. From today's news there is a crude future WTI. I also requested to open a etrade futures account. Is there any other futures I can be recommended?

Also for optoins trading, the buyer of option has a right to purchase the underlying securities but not an obligation (call option i.e.), but it appears that for futures, the buyer of futures has an obligation to purchase.

Now most of times, traders trade options with fluctuating prices each other and before the expiration date or before some exercises it. Is it the case with futures? If I buy a future, can I just trade the futures before expiration date to other just like options? Does future's price movement similar to the options?
Thanks.,
 
Ur obligated to the agreement only on the expiry date. That is, to purchase the underlying (in this case oil) on the expiry date. 100% obligated. That is for the buyers of course. The sellers have to provide the underlying. This is the definition of a futures contact. " To fix the current price at a future date". Nothing can be executed b4 expiry.

From what is sounds like from ur line of questioning. I think the best way to explain is : futures trading is very similar as "sell to open" with an options contract. Because sellers are fully obligated to their agreement. Except it works for both the buyer and seller with a futures contract.

You're fully obligated to the agreement while u have the trade open. At the end of each trading day, you're required to either make or recieve a margin payment. This is based on ur trading for that session. The obligation kicks in each day in that if the market moved against you, you must match it point for point. With Oil futures, they are priced at $10 per 1cent. So if oil moves 10cents then the margin amount would be $100. Now lets say the market moved $1 in your favor then this would result in a $1000 payment per each contract held open. If it moved another $1 then an additional $1000 would be recieved.

As you can see this is different with options because options will make different returns based on market movement. They won't match the market. Futures are much more simplistic in nature as they don't have as many variables.

With a future you don't get this luxury of just holding the trade. You are obligated to match it no matter how far it moves against you. This is viewed as much more risky.

Here is the contract specifications for oil :

http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contractSpecs_futures.html

You can trade options over oil futures contracts, which are quite popular, they currently have an open interest of 2.6 million :

http://www.cmegroup.com/trading/ene..._flyout&utm_medium=energy&utm_campaign=flyout
 
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I'd stay away from e-trade to. They are always comming last on barrons reviews. If the account isn't open and funded then close the account.

If u plan on holding the trade for a while then it should be ok. If you decide to day-trade the ul need a different broker.
 
Before you buy it, you gotta understand like CBC said, you're obligated to buy or deliver that contract after it expires. So if you continue to buy the current month contract, you will end up selling the current month and rolling it over to the following month. That will eat up your account in two ways. 1) You're paying commissions to buy the current month, sell the current month, and buy the following month. Each month you're making 2 trades (1 round lot).
And 2) the forward months have contango generally. What that means is the price for next month is higher than the current price.

If you look here http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html
you will see that every month, the is up. This generally happens in the market because it costs money to store the commodity. So like Cotton, it has to be stored in a warehouse that has the proper humidity to keep the cotton from going bad. You're paying that price and it's built into the market. So if you rollover every month, you are paying as much as $2 on contango.

If you put a crude oil chart next to a chart of an oil ETF, like say DBO or USO, you will see how they have the same correlation, but these ETFs are losing more value than the front month futures price. That's because of the contango.

Lastly 3) If you buy out in the future month, say December 2017, it will also cost more due to spreads. There isn't much liquidity in there, so if you can get lucky, you might get a very low entry, but be prepared to pay a premium for the lack of liquidity.

Also, I thought I'd just throw this in there, but a crude oil contract is 1000 barrels. That's over $30,000 for one contract. So if you're using leverage, be very careful. You only need like $1000 I think for some brokers to buy 1 contract. But if the price of oil should drop 1 dollar, you will lose $1000 in your account. So be careful if you're using leverage. You could get wiped out.
 
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