WTI oil is the world's most actively traded commodity and its price is highly volatile. Volatility is the amount a price fluctuates with no regard for direction. For example, if oil volatility is 10% and the current oil price is $50 per barrel, it means within the next year traders expect oil price to change by $5 up or down (either reach $55 or $45 per barrel). In reality oil fluctuates a lot more than that; in the last year it has fallen from around $100 to $50 (-50%)!
Traders may benefit from volatile oil prices by using option strategies; through buying Call and Put options you can create limited risk trades which benefit from rising volatility. The following article explains three option trades examples.
Trading an Uptrend – Buying Call Options
If you are expecting WTI OIL price to go UP and high volatility, you may consider buying a Call option which gives you the right to buy oil at a certain price (known as strike price) over a certain period of time. As the price of oil rises above the strike the option becomes more valuable. Why? Because your strike price is cheaper than the market and the more your strike can ‘beat' the market, the more valuable the option.
When you trade an option you must chose the strike, expiry and amount. For example, the below image is a Call option trade in the easy-forex web platform, with ‘strike' $51′, expiry' 7-days and ‘amount' 100 (as highlighted by the orange box). That is, an option to buy 100 barrels of oil at $51 per barrel before expiry. The total cost to buy the option is $103 (as highlighted by the blue box). If during the next week, the price of oil rises above $52.03 (strike price + cost of option at $1.03 per barrel) your option will return a profit. If the price does not rise, you may make a loss however this loss is limited to the cost of the option (premium at open), in this case that is $103.
This is a classic example of trading a rising WTI oil price in a volatile environment; you may enter a trade on a fixed risk and you do not have to worry about volatility stopping you out. As long the amount you paid for the option (‘premium at open') is covered by expiry, you will reap the benefits of a volatile uptrend.
