How to Trade Crude Oil
Trading crude oil involves owning it. While you could purchase an oil well, it isn't practical for the sake of trading. Fortunately, oil is a commodity. That is, a real asset that can be traded through exchange houses through futures contracts, exchange traded notes, royalty trusts, and oil and gas exploration companies. The most direct way to trade crude oil is through futures and Exchange Traded Funds (ETF's).
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Instructions
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1
Review the definition 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. This future strike price is called the expiration date. Brent Crude Oil Futures (BZQX) and the Light Sweet Crude Oil (CLQX) are two examples of futures.
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2
Find the symbol for a crude oil Exchange Traded Fund (ETF). These funds trade just like regular stock and are designed to mimic the exact price movement of crude oil as a separate futures contract. The symbol for the crude oil ETF is USO.
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3
Determine the details of your purchase. Now that you have the ticker symbols for crude oil futures and ETF's, you can make a purchase. How much do you want to wager? There are two major differences between ETF's and Futures. While ETF's may be less riskier and require a smaller initial starting price the leverage required (50% deposit) does not provide as much flexibility compared to crude oil futures contracts which only require a 5% deposit. With an ETF you would need to deposit $50,000 for a $100,000 crude oil contract, but only $5,000 for the futures requirement. Futures contracts are also traded 24 hours a day, unlike ETF's which trade like stocks.
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4
Consult with your broker. If speaking to a live person or over the phone, you will want to provide the symbols discussed in Steps 1 and 2 (BZQX, CLQX and USO). Also be sure to ask for margin or deposit requirements on each. You can also do your own research by looking these symbols up on Yahoo! or Google Finance.
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5
Purchase shares or contracts. Once you feel comfortable about the differences between trading futures contracts versus ETF's, make a purchase either online or through your brokerage. One reputable online brokerage is Etrade.
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Comments
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renewableray
Oct 03, 2010
No deposit required to trade USO. This like many other ETF's can be traded just like stocks, but be careful. A lot of energy ETF's experience "slippage" and should only be used for day trading.
