Oil Options
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Started by wglassfo - Jan. 23, 2022, 7:15 a.m.

I am thinking we should see an increase in energy demand

I am assuming this administration is and will continue to be very hostile to  any new fossil development

What are your thoughts about buying 2024 call options

Will OPEC  keep oil at current prices

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Re: Oil Options
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By mikempt - Jan. 23, 2022, 8:37 a.m.
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Cheaper to trade the E-Micro Crude oil contracts. I've done well with them

By metmike - Jan. 23, 2022, 3:06 p.m.
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Thanks Mike!

Never traded E-Mini's but with regards to buying calls or puts,  my personal view would strongly favor SELLING them based on the high likelyhood of most of them expiring worthless that are way out of the money and cheap.

Thanks Wayne,

You are basically being price gouged for the right to own an option.....paying MORE THAN what they are really worth, in hopes that the market will greatly EXCEED the expectations of the market(which has dialed in their value........and added additional premium for the right to hold them for an X period of time.

With call options, the price can go up a bit and  you might still lose money/value from time running out.

If you buy a June Crude Oil $100 call and hold until expiration, you lose ALL your money if crude is trading at $95 when they expire.

Any price spike above $100 and you could cover the call options for a profit. However, if you are long futures from the current price...........you will also make lots of money when crude is trading $95.

Yeah, I know there is more downside risk with futures compared to options.  That's what you pay to minimize.

You can always pick a good, lower risk spot to buy Crude futures and put in a stop to limit risk.

Everybody is different but the options market will price gouge your butt off for the right to limit your risk to the price you pay...........which you usually lose.

In the long run, people that buy options all the time must hit some huge grand slam trades to pay for all the trades that feature their options expiring worthless.

One psychological problem happens in those traders. That one huge grand slam is remembered and over weighted and they keep believing they might do it again every time they buy options.........as they slowly fritter away their trading capital..........while convincing themselves that they are limiting risk and maximizing profit potential.

They might be limiting the potential size of a loss on that trade but they are greatly increasing the chance of a loss(of the cost of the option) 

They might have something close to unlimited profits........after taking away the difference in strike price less the current price and taking away the cost of time. 

But that difference and time is assigned a value by the really smart options sellers(that do it for a living and in almost every base, will know more than you)  and they will sell it to you, usually  at MORE THAN ITS WORTH.....which is how they make a living at it.

They are wrong sometimes of course but it wasn't because they gave you a good deal on the call options at the time.

When they are wrong and you make money with your long options, you would have made MORE money by being long futures almost every time often by a wide margin if you hold on for a long time and its close to expiration and  you are barely in the money. 

When they are right, which is most of the time..........they make money........which means that you don't.

Not saying that crude isn't going much higher or that you can't make money buying options. Just stating the reality of buying/selling options.

I used options only 2 times in my life and both times it was to SELL way out of the money coffee options that were way overpriced over 20 years ago based on excessive weather premium. 

Re: Oil Options
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By Richard - Jan. 23, 2022, 5:57 p.m.
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Sure. Go for it.

By metmike - Jan. 23, 2022, 7:29 p.m.
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Wayne,

I just noticed that you want to buy crude oil calls for the year 2024. Wow, an expiration 2+ years from now!

That's definitely something I have 0 personal experience with  but do have some knowledge about.

My guess is that the time value on those is going to be enormous and very expensive.

You will need a pretty big move higher to make money on those if you hang on for a long time.

When the price of crude does not go higher, even if it stays flat, the time value(theta)  of your calls drops. 

The move higher in crude will have to be much higher for you to make money this way because it also has to pay for the time value that erodes every day that you hold on to the crude oil calls.

 That time value seems like a big benefit, without having to worry about losing money when crude drops lower......actually ensures that you will be losing SOME money every single day from the erosion of time value that marches on for 2 years and decreases that part of the value dialed into the price.......no matter what.

Time value is 0 on the day of expiration. I imagine its waaay up there in Jan 2022 for 2024 calls on anything.

The Importance of Time Value in Options Trading

https://www.investopedia.com/articles/optioninvestor/02/021302.asp


What Is Theta?

https://www.investopedia.com/terms/t/theta.asp


Like I said earlier, many of the smartest traders SELL options based on the fact that options lose time value every single day, regardless of the price.  If they are right about price direction, they make money. If the price doesn't change.......they make money. If the price goes in the wrong direction by a little........they still make more money from selling time value compared to the loss in intrinsic value.

They have to be really wrong about the price and have it go way against them to be greater than what they ALWAYS make selling time value.

Buying options, especially that far out.......is sort of like going to a Casino and thinking that you will come out with more money than you came in with.

Go enough times and play the right games and you will leave with more money than you came with one time.........but the odds of the games are stacked against you. Unless you're a card counter, in the long run you can't beat the odds.

When you win some games, it gives you an adrenaline rush that sometimes overpowers critical thinking using common sense and knowing that the house ALWAYS wins in the long run. You can play for that adrenaline rush but it will cost you plenty most of the time. 

The odds are stacked greatly against you similar to this with options. The sellers of options are like the house in a casino. It's their game. They decide what price to sell the options to you at based on them understanding the market and knowing what prices to set to give them  high odds of making money. 

The price that you pay is also related to what the strike price is. If the strike price is the same as the current price(at the money)............you will pay out the wazoo for an option that expires 2+ years from now, which gives you the right to be long.

I will just take a guess that 2024 crude prices will have to increase $10 from their current price for your call options at the money just to break even(it has to expire HIGHER than the current price by, maybe $10).

So most people by WOOM Way out of the Money call options to they don't have to pay that extremely high intrinsic value to help offset the time value cost that will be eroding every day(which is less for those compared to in/at the money calls).

Let's say you try to go cheap and do what Richard has done a dozen times........load up on $150 or $200+ call options(which have expired worthless each time)

To make money, crude might only have to go a few bucks higher than the strike price.........$153 for instance.

And if crude gets to $153, it likely to go one heck of a lot higher  than just $3 higher than your strike price........and thats when you REALLY CASH IN. 

Every $1 higher than that is like actually being long crude because the options give you the right to be long/exercise that right any time.

If you are long March 2024 150 call options, for instance. You basically have the right to be long March crude anytime that you want before those options expire.


If crude goes way up and is  trading at $149 in March 2023, with a year to go, you can sell those options for a big profit because lots of people will pay good money for the right to be long from $150 in March 2024 since its only $1 out of the money, compared to $80 out of the money right now.

If you hold those options until they expire in 2024 and crude oil is trading at $149..........you lose every penny that you spent on them. Crude can go up $70 from the price which crude was trading at when you bought the 150 calls at but if they expire when crude is at $149..........you get 0 and the seller of your option gets the every penny you paid them.

If you had been long 1 futures contract instead, you would have made $70/contract.....$70,000!

However, for your March 2024, 150 strike call options, with crude up $70 from todays March 2024 price

Intrinsic value =0

Time value =0.

You lose everything. The seller gets all your money.

If crude oil is trading at $153 when they are getting ready to expire.......of course you would exercise that right to be long from $150 and a profit of $3,000/contract.

The time value would be used up but be less than the the $3($3,000) of futures profits you had when exercising your WOOM call options.

Anything above $153 is exactly the same profits as if you were actually long CLH4(March crude oil).  You could stay long or get out at that point.

Your decision to stay long if March crude was at $153 might be determined by when March crude expired. The March options always expire first....then there is a week or so until the actual futures expire.

Most people might decide to sell the call options at any point between now and march 2024 if crude had a massive spike higher.

Lets say crude this year got close to $150. Your 2024  calls would be worth a ton of money then(not nearly as much as if you were long or the calls were in the money). It would be dumb to hold on to them for another 18 months and take the chance that crude didn't go up anymore and you losing every penny in March 2024.

Volatility would be high(helping the value to go up) there would still be time value and you would lose everything if it was just a spike higher that came back down well below $150.