Alternatively, you’d buy or sell a put option which gives you the right, but not the obligation, to buy or sell oil at the strike price or before a set date. If you buy a put option, you have the right to sell an oil market at the strike price before a set expiry. For this right, you’ll pay a premium.
If you sell a put option, you have the obligation to buy an oil market at the strike price before a set expiry. For taking on this obligation, you’ll receive a premium.
Depending on your trading strategy, you’ll use these methods to get exposure to oil markets by taking a long or short position.
For example, if you expect the price of brent crude oil to rise from $100 to $110 a barrel as a result of ongoing political uncertainty, you might decide to trade oil options. You decide to use a call option, which grants you the right to buy the oil at $105 a barrel at any time within the next month.
If the oil rises as predicted beyond $105 before your option expires, you’ll be able to buy the asset at a lower price. Conversely, if it remains below the strike price of $105, you’re not obligated to exercise your right and can let the option expire.
Note that since the prediction was not accurate, you’ll incur a loss on the premium you paid to open your position.
