How to Invest in Barrels of Oil
Oil prices respond quickly to supply and demand changes.
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Trading barrels of oil can help diversity your investment portfolio. Oil is a volatile commodity and investors can profit from its price moves. Depending on individual risk/reward tolerance, investors can trade barrels of oil using commodity futures contracts, options and exchange traded funds.
Go to your online futures, options and ETF trading account or open an account if you do not have one. Use your brokerage account to conduct research and enter the trade online. One crude oil futures contract controls 1,000 barrels, or 42,000 gallons, of oil. Crude oil is highly leveraged and each one-cent move per barrel is worth $10. Crude oil is traded on the CME Group exchange, which requires that you keep an initial margin of $5,610 and a maintenance margin of $5,100 in your account for each futures contract you trade. Oil prices can move fast, so monitor your trade and be sure to close it out before the contract expires.
Step 2Risk less of your account principal by trading crude oil options. Unlike crude oil futures, the most you can lose when you buy an option is your purchase price plus the commission. For example, if crude oil is trading at $86.73, you can buy a call option with a strike price of $88.50 for $3,220 that expires January 2013 ($3.22 option cost x 1,000 barrels). If the price of oil is above the $88.50 strike price before the option expires, you have made a profit on the trade -- but if it is below the strike price, you have lost your investment.
Step 3Reduce risk even more by investing in crude oil exchange traded funds The United States Oil Fund and United States Brent Oil Fund are two popular highly traded ETFs. Buying an ETF limits your loss to the initial purchase price plus commission, and you don’t need to open a margin account. You can research ETFs and trade them through your online account as you would stocks.
References
Tips
- Buying one oil commodity futures contract is a legal agreement that you will purchase 1,000 U.S. barrels of oil (42,000 gallons) at a set price the day the contract expires. For example, if oil closed at $86.73 at contract expiration, you must pay $86,730 ($86.73 x 1,000 barrels) and take delivery of 1,000 U.S. barrels.
- The U.S. Energy Information Administration provides a free weekly summary of oil and natural gas products.
Warnings
- Oil futures are highly leveraged investments that carry substantial risk. Trade only with money you can afford to lose.
Writer Bio
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.