How to Profit from Oil Price Volatility

(MENAFN- Mamba Digital Ltd)

If traders can correctly identify the direction of the current volatility in oil prices, they will have a great chance to profit. The predicted change in an instrument's worth, positive or negative, is used to gauge volatility. For instance, if oil volatility is 15% and the cost is $100 right now, traders anticipate a 15% shift in oil prices over the following year.

Traders anticipate increased price volatility in the future if the current volatility is higher than the previous volatility. Traders expect reduced price volatility in the future if the recent volatility is lower than the long-term average. The implied price volatility of at-the-money strike prices for the exchange-traded fund known as the U.S. Oil Fund is tracked by the Cboe's Crude Oil ETF Volatility Index (OVX). Through purchasing NYMEX crude oil futures, the ETF monitors the movement of WTI Crude Oil (WTI). Start your Oil trading journey and improve your trading strategies with Oil Profit

Purchase and Sale Volatility

Through derivative methods, traders can profit from fluctuating oil prices. The markets that offer crude oil derivative products involve concurrently purchasing and selling options and taking positions in futures contracts. A "long straddle" is trading technique investors use to buy volatility or profit from an increase in volatility. The purchase of call and put options with the same strike price constitutes it. The approach turns profitable if there is a substantial shift in either the upward or downward direction.

For instance, if oil is trading at $75 and the at-the-money strike prices of the put and call options are $3 and $4, respectively, the approach becomes lucrative for an increase of more than $7 in the price of oil. Thus, the process is beneficial if the oil price increases over $82 or falls below $68 (excluding trading fees). You can also minimize this strategy's initial premium expenses by employing out-of-the-money options, often known as a "long strangle," which would require a more significant movement in the share price for the approach to be profitable. On the upside, the maximum profit is potentially limitless, while the maximum loss is only $7.

A "short straddle" is a trading technique that entails selling volatility or profiting from declining or ongoing fluctuations. Selling a call and a put option at the same strike price constitutes it. If the price is range-bound, the technique is profitable. When oil is trading at $75, and the at-the-money strike prices of the put and call options are $3 and $4, respectively, the strategy is successful if there is no more than a $7 change in the price of oil. Therefore, the approach is practical whether oil prices increase to $82 or decrease to $68 (exclusive of brokerage fees).

A "short strangle," which uses out-of-the-money options to execute this technique, widens the range in which it is beneficial while lowering the maximum profit that you may realize. On the upside, the most significant loss is potentially limitless, while the maximum profit has a $7 limit.

Bearish and Bullish Approaches

The bear call spread, which entails selling an out-of-the-money option and buying an even farther out-of-the-money call, is a well-known bearish strategy. The difference between the premiums determines the net credit amount and the strategy's maximum profit. The gap between the strike prices and the net credit amount represents the ultimate loss.

The highest profit is the total credit, or $2 ($2.5 - $0.5), and the maximum loss is $3 ($5 - $2); for instance, if oil is trading at $75 and $80 and $85 strike-price call options are trading at $2.5 and $0.5, respectively. You can also use this approach with put options by selling an out-of-the-money put and purchasing an even more out-of-the-money put.

The Verdict 

Traders can profit from fluctuations in oil prices the same way they do from changes in stock prices. You can make this profit using derivatives to obtain leveraged exposure to the investment without owning or needing to own the underlying asset.

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