To name a one can invest in oil markets using ETF's, buying individual stocks, using the futures markets and a few more options.
As a commodity broker and Vice President of Cannon Trading, a commodity trading firm, I would like to expand on the financial vehicle I UNDERSTAND THE MOST: Using futures, commodities and future options to invest in oil markets.
Using commodity futures trading to invest in oil markets may be one of the most risky form of investments in oil markets, probably the most speculative but in return to the high risk also comes the possibility of quicker, higher returns.
Crude Oil Futures is one of the most volatile commodity markets. This market "enjoys" influence from variety of factors such as: Geo political, supply/demand, domestic inventories and technical trading. One of the foundations of commodity markets is leverage. That leverage magnifies losses as well as winnings. In addition to Crude Oil futures we also have heating oil futures, unleaded gasoline futures, natural gas futures and a few more markets in the energy sector. The ones mentioned above enjoy the highest trading volume.
The average investor has a few options on how to get involved in trading the oil markets on the futures exchange.
- Using futures contracts
- Using options on futures
- Using a combination of options and futures
- Trading oil markets from the longer term perspective
- Trading oil markets from the short term perspective.
If you never traded futures or futures options before, my personal recommendation is to contact an experienced broker ( Cannon Commodity Trading) ask questions, share your level of knowledge, desired risk profile/appetite, amount of risk capital and if you have any preference to points 1 through 5 mentioned above.
This in return will allow the commodity broker come up with a few different trading ideas for you.
My personal risk appetite when it comes to longer term trading in oil markets is to use futures in conjunction with options. I like to use the options either as insurance or to collect premium if I am holding a longer term position. This article does not have enough space to describe the risks and opportunities along with the different methods of trading. There are many different ways.
One of the more common ways investors try to speculate in the oil markets is by having a certain point of view of the longer term fundamental outlook for the oil markets. It may be based on speculation of war in the middle east, perhaps the investor read an interesting article about supply/ demand status in the oil markets and he or she would like to implement their outlook by speculating in the futures markets. Below you will see a brief and basic summary of options strategies.
1. Bullish Market Strategies
2. Bearish Market Strategies
Commodity futures trading can be overwhelming for newcomers. It is definitely RISKY.
Talking to an experienced commodity futures broker can really help you evaluate the in and outs, amount of risk capital you need and decide if futures and commodities is the financial vehicle that is appropriate for you.
If on the other hand, you do have experience, time and risk capital and would like to invest in oil futures then traders and investors have quite a bit of information and access to global oil markets at very low cost. You can now trade markets like crude oil futures, North Sea crude oil futures, unleaded and heating oil and more than a few other futures markets electronically, get your fill within split seconds and either day-trade , long term trade or use options in variety of ways.
Last but not least, managed futures may provide even one more way to invest in oil markets. There are certain CTA's (commodity trading advisors) who specialize in trading the oil markets. The CTA needs to be registered with the CFTC (commodity Futures Trade Commission) and be a member of the NFA (National Futures Association). The CTA will have a disclosure document detailing their background, past performance, details of their trading program and much more.
Managed money usually requires higher starting capital than self directed account but can offer a different way to invest in oil markets as well.
About the author:
Ilan Levy-Mayer is Vice President and Senior Broker at Cannon Trading Company. He holds an MBA in Finance and Marketing from Hebrew University in Jerusalem. His experience in the industry dates from the beginning of crude oil futures, and he helped developed several trading systems. In addition, Ilan written several articles about trading methods and trading psychology, and have been quoted and published several times in SFO magazine, Futures, and Bloomberg. Ilan has been licensed as a commodity broker since 1998.
Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past Performance is not indicative of future results.
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