Every investor wants to assume the least amount of risk for a potential reward. But in no other market do investors have so many choices to exploit different views about which way crude oil prices are headed.
For example, some investors view crude oil as a primary long-term investment and choose to buy long-dated futures or options contracts. If you want to participate in the global crude oil economy sign-up here.
Other investors see crude oil as more of a short-term speculative trade, so they choose to buy or sell futures that expire in just a few months. Some investors prefer the safety and liquidity of exchange-traded instruments, while others like the liquidity but want more personalized service. Let’s find out whether oil trading is profitable or not.
Crude Oil Trading
You can trade Crude oil in exchange-traded funds (ETFs) or commodity futures and options. ETFs are products issued by mutual funds, limited partners who invest in registered investment companies as shareholders, as an ordinary investor would. ETFs are often used to track the price of individual stocks or sector indexes.
On the other hand, commodity futures and options products are not limited partners. Instead, commodities futures and options are traded in over-the-counter markets, similar to a stock market where traders (participants in over-the-counter markets) can buy or sell contracts for physical commodity stocks.
Some ETF tracks the price of West Texas Intermediate, one of the most popular crudes globally. The composition of this ETF is relatively diversified, with five industries represented.
Profitability of Crude Oil
The price of crude oil can rise or fall 60% or more in a few months, and it is not unusual to see a 10% daily move. Crude oil trading can also be highly speculative because the number of futures and options contracts traded in a day is much higher than the daily volume of crude oil.
The volatility in crude oil prices makes it profitable compared to other investment vehicles. To determine whether trading crude oil is profitable, you have to analyze the price movement of the underlying crude oil futures or options for a specified period. The profitability of crude oil trading should be measured from the standpoint of risk-adjusted return.
Oil as An Asset
Many financial experts consider oil an asset because of its fixed supply, unlike stocks and bonds that can only be out of thin air. Given these factors, it is not surprising that investors are attracted to oil as an investment, especially when there are many price changes within a short period.
Risk vs Reward Tradeoff
One crucial factor to consider when trading crude oil is the risk vs reward ratio. There are opportunities to make profits both on the long and short sides. For example, a trader can buy a put option for crude oil if he believes the price will decrease or a call option if he thinks the price will rise.
Buying a call or put option would involve paying a premium to enter the trade. If the trader buys crude oil futures, he is obligated to take ownership of the underlying energy assets but is not required to pay any premium.
In major markets, spot prices are typically associated with the cash transactions for immediate delivery of a commodity like crude oil.
On the other hand, futures markets are generally used by longer-term participants to establish a price for future delivery and to reduce the risk of default by either party in the intervening time period. Today’s oil trading is done through different instruments such as futures, options contracts, and derivatives.
Crude Oil Futures
Major trading hubs for crude oil futures include London Brent and New York’s NYMEX (New York Mercantile Exchange). A trader can trade in either of these crude oil futures markets by using a variety of contracts with varying maturities based on market prices at the end of the trading day.
Highly Liquidity
Nowadays, numerous sites have crude oil trading where participants from all over the world trade daily. High-volume platforms allow anyone to participate in crude oil trading because high volumes make it more liquid than most other commodities worldwide.
These sites will provide you with a wide range of options, and depending on your needs; you can access them through your mobile phone or computer.
Some of these investing options also drop the requirement for having significant capital.
In short, oil trading is highly profitable as both a short-term speculative asset and a long-term investment vehicle.
