How to Trade Oil Futures and Options
Futures and options are both derivative contracts. What this means is that their prices are derived from the underlying instrument--oil, in this case. When you purchase a futures or options contract you do not actually own the underlying asset, but you can control it, allowing you to participate in making money when it rises or lose money when it falls.
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Instructions
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Select an options and futures broker. Make sure that the broker you choose is a member of the Futures Trading Commission (FTC). You should also go to Elite Trader (see References) and take a look at some reviews of the broker that you are considering. This is a trading forum that has dozens of reviews of brokers from amateur traders. A few futures and option brokers that you can consider are TradeStation Securities, Interactive Brokers and OptionsXpress (see Resources).
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Check the 200-day moving average (DMA). This is a key technical tool that professional traders look at to determine the trend of the market. It is simply the average price over 200 days plotted on a chart. All technical analysis tools have this common tool. If you don't have one then you can use the free tool at Market Watch (see Resources). If the market is trading above the 200 DMA, you will want to be a buyer of oil. If it is below, you will want to be a seller or short seller (a person who makes money when the market falls).
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Check the trend of the market. You will only want to be a buyer of oil when the market is trending up and you will want to be a seller or short seller when it is trending down. To determine the trend, look at a weekly chart and create a channel by drawing a line across the tops of the price chart. Draw another line across the bottoms of the price charts. Looking at the chart from a few feet away decide whether the channel is trending up or down. If it is going up you will want to purchase the oil contract near the bottom of the channel. If it is moving down you will want to short sell it near the top.
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Choose an options contract. Make sure that there is at least six months of time left on the contract. This will give it enough time to move in your direction. If you don't know how to choose a contract, picking an "At The Money" (ATM) contract is generally best. For example, if oil is trading at $75, an ATM contract is the one with the strike price (the price at which the option contract can be exercised) closest to $75.
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Choose a futures contract. Unless you have a reason to purchase a contract with a later date, purchasing a futures contract with the nearest expiration date is generally the best. For example, if it is May, you will want to purchase either the May or June contract, because these contracts generally have the greatest number of buyers or sellers, which means they will have a lower bid/ask spread (this means it will cost a bit less).
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References
Resources
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