Futures Contract Crude Oil
What are crude oil futures?
Crude oil futures can allow individual investors to participate in one of the world's most important commodity markets. Crude oil futures are considered a key benchmark for the entire energy industry and can be used for hedging and speculating. One of the most widely used commodities, it's used for gasoline, diesel fuel, heating oil, and jet fuel. Crude oil futures can fluctuate based on the geopolitical environment. In recent years, CME Group has introduced the mini crude oil futures contract and the micro crude oil futures contract. The micro crude oil futures contract is 1/10th of the size of the standard crude oil futures contract.
What is a Futures Contract?
The buyer of a futures contract is taking on the obligation to buy and
receive the underlying asset when the contract expires, and the seller is taking
on the obligation to provide and deliver the underlying asset at the expiration
date.
A futures contract is a legal agreement to buy or sell a specific commodity
asset or security at a predetermined price on a specified date in the future.
These contracts are standardized in quality and quantity to facilitate trading
on a futures exchange.Why trade crude oil futures?
Why consider trading futures contract crude oil?
Investors can use crude oil futures to hedge against portfolio investments that may be sensitive to crude oil price changes.
Investors and traders can use crude oil futures to speculate on the future price of crude oil, which might be used as an alternative to oil and gas stocks. Crude oil prices can change due to many factors, but primarily from the perceived changes in supply and demand that come from both overall output worldwide and the economic health of the industry's major consuming countries. Options on crude oil and micro WTI crude oil futures are also available.
Companies use futures to lock in an advantageous price for oil and hedge against adverse price movements. However, they're popular among speculative traders too, as there is no need to take delivery of barrels of oil – although you have to fulfill the contract, this can be via a cash settlement. To do so, you must open a futures account with a broker that trades in oil futures. Two of the world's most popular crude oil benchmarks – WTI and Brent crude – are often traded through future contracts.
- You can buy crude oil stock, get in quickly, and get out just as quickly.
- Recall that a short option position collects the premium and assumes the risk.
- In contrast to crude oil futures, the long call/put crude oil options are not margin positions; thus, they do not require any initial or maintenance margin and would not trigger a margin call.
Benefits and risks of trading futures contract crude oil
Understanding the benefits and risks of crude oil futures is essential before placing a futures trade. With crude oil futures, you can trade nearly 24 hours a day, five days a week, and take advantage of potential trading opportunities regardless of market direction. Crude oil futures also provide the ability to trade with greater leverage and can allow a more efficient use of trading capital. However,
trading leveraged products like futures contract crude oil is not suitable for all investors. It involves risks that greater losses can occur with smaller market movements and more than your initial investment can be lost.
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