If you want to invest in oil, futures and options give you two excellent choices. But many people don’t fully understand these investing crude oil strategies, and it’s important to know what they are so you can make the best financial decisions. Here is a closer look at options and futures, to help you make better investments.
Futures
When you are investing crude oil futures, it gives you a chance to speculate on the price of oil. Unlike stocks, futures give you the opportunity to buy oil at the same price it is now, in the future. For example, if you buy a futures contract at $49 a barrel and in six months the price is $58 a barrel, you can buy your oil (usually in 1000 barrel increments) at $49 and immediately sell at $58. You can also wait if you think the price may go up even more.
Options
Some crude oil futures contracts have options. For example, you can go long or short. Going long means you have a long call option. It gives you the right to buy at the strike price within a specific date. If you choose not to exercise this option, nothing happens, but once it expires the deal is over. The investor is buying the right to purchase oil (not actual barrels of oil).
Put options (short call options) work like long call options, except the speculator hopes that the price will drop, so he or she can sell the call option for a profit.
Investing Crude Oil Futures and Options – What’s the Difference?
With futures, the investor is obligated to buy or sell by a specific deadline. With options, the investor may or may not buy or sell, and can walk away from the deal. You have to buy crude oil options upfront, but with futures, you have no upfront costs.
Crudefunders offers alternatives to investing crude oil options and futures.