The recent volatility in oil prices presents an excellent opportunity for traders to make a profit if they are able to predict the right direction. Volatility is measured as the expected change in the price of an instrument in either direction.

If the current volatility is more than the historical volatility , traders expect higher volatility in prices going forward. If the current volatility is lower than the long-term average, traders expect lower volatility in prices going forward. Oil Fund Exchange traded fund ETF. The ETF tracks the movement of WTI Crude Oil WTI by purchasing NYMEX crude oil futures.

15 ETFs With The Most Liquid Options | yvajotefihy.web.fc2.com

Volatility's Impact On Market Returns. Traders can benefit from volatile oil prices by using derivative strategies. These mostly consist of simultaneously buying and selling options and taking positions in futures contracts on the exchanges offering crude oil derivative products. A strategy employed by traders to buy volatility, or profit from an increase in volatility, is called a " long straddle. The strategy becomes profitable if there is a sizeable move in either the upward or downward direction.

Top 21 Oil & Gas ETFs

For more, see What Determines Oil Prices? It is also possible to implement this strategy using out-of-the-money options , also called a long strangle, which reduces the upfront premium costs but would require a larger movement in the share price for the strategy to be profitable.

4 Basic ETF Option Trading Strategies

How To Buy Oil Options. The strategy to sell volatility, or to benefit from a decreasing or stable volatility, is called a " short straddle.

The strategy becomes profitable if the price is range bound.

It is also possible to implement this strategy using out-of-the-money options, called a "short strangle ," which decreases the maximum attainable profit but increases the range within which the strategy is profitable.

How Low Can Oil Prices Go? The above strategies are bidirectional — they are independent of the direction of the move. If the trader has a view on the price of oil, the trader can implement spreads that give the trader the chance to profit, and at the same time, limit the risk. A popular bearish strategy is the bear call spread , which consists of selling an out-of-the-money call and buying an even further out-of-the-money call.

The difference between the premiums is the net credit amount, and is the maximum profit for the strategy. The maximum loss is the difference between the difference between the strike prices and the net credit amount. This strategy can also be implemented using put options by selling an out-of-the-money put and buying an even further out-of-the-money put.

A similar bullish strategy is the bull call spread that consists of buying an out-of-the-money call and selling an even further out-of-the-money call.

The difference between the premiums is the net debit amount, and is the maximum loss for the strategy.

The maximum profit is the difference between the difference between the strike prices and the net debit amount. This strategy can also be implemented using put options by buying an out-of-the-money put and selling an even further out-of-the-money put.

It is also possible to take unidirectional or complex spread positions using futures. The only disadvantage is that the margin required for entering into a futures position would be higher as compared to entering into an options position. Traders can profit from the volatility in oil prices just like they can profit from swings in stock prices. This profit is achieved by using derivatives to gain a leveraged exposure to the underlying without currently owning or needing to own the underlying itself.

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. How To Profit From Oil Volatility With The Following Strategies By Investopedia June 23, — If the trader has a view on the price of oil, the trader can implement spreads that give the trader the chance to profit, and at the same time, limit the risk A popular bearish strategy is the bear call spread , which consists of selling an out-of-the-money call and buying an even further out-of-the-money call.

The Bottom Line Traders can profit from the volatility in oil prices just like they can profit from swings in stock prices.

Betting on an expected move is fine, but one must understand the risks involved in a position - and consider the alternatives. These five strategies are used by traders to capitalize on stocks or securities that exhibit high volatility. Learn about this low-risk, bearish options strategy used to speculate on major market declines. The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.

Learn how long straddles, long strangles and vertical debit spreads can help you profit from the volatility that stock analysts expect for During times of volatility, traders can benefit greatly from trading options rather than stocks.

The reverse calendar spreads offers a low-risk trading setup that has profit potential in both directions. Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.

Learn when a trader may want to buy out-of-the-money options either for hedging purposes or to profit if the underlying stock Invest in the oil and gas drilling sector with confidence by employing one of several winning options strategies that work Learn about a couple of good options strategies that traders can use to enhance investing profitability when investing in Learn the options strategies top traders use to take advantage of the volatility in the financial services sector and the Choosing which specific option to buy can often be a complicated process, and there are literally hundreds of optionable Learn how using an out-of-the-money time put spread can be used to hedge downside risk by reducing the amount of premium No thanks, I prefer not making money.

Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator. Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers.

Get Free Newsletters Newsletters.

All Rights Reserved Terms Of Use Privacy Policy.