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How to Trade Crude Oil Futures & Options
What is a commodity futures contract?
A commodity futures contract is an agreement to buy or sell a particular commodity at a future date. The price and the amount of the commodity are fixed at the time of the agreement (purchase / sale). Similar to trading stocks, commodity futures contracts trade on regulated futures exchanges such as the CME (Chicago Mercantile Exchange) or the ICE (Intercontinental Exchange). These contracts typically can be bought and sold throughout the duration of the contract. The majority of commodity futures contracts are liquidated prior to the delivery / expiration date.
A commodity futures option gives the purchaser the right to buy or sell a particular futures contract at a future date for a particular price. These contracts can also be bought and sold throughout the duration of the contract’s term.
Commodity futures & options are bought and sold for both speculative and hedging purposes.
With limited exceptions, commodity futures and options must be traded through futures brokers who are registered with the CFTC (Commodity Futures Trading Commission) and NFA (National Futures Association).
The Futures Contract:
WTI Light Sweet Crude Oil futures – ticker symbol: CL.
This is the world’s most liquid and actively traded crude oil contract. It is the most efficient way to trade today’s global oil markets.
WTI Crude Oil trades nearly 1.2 million contracts a day, with each contract equal to 1,000 barrels and valued at roughly $34,170.* The contract trades in increments of one cent per barrel.
Priced out of Cushing, Oklahoma, NYMEX WTI also has deep ties to energy markets worldwide.
*Data as of May 26, 2020
Trading futures & options.
To start trading WTI Crude Oil futures & options, you will first need to open a futures trading account…
Once you’ve opened an account, you will have access to our trading platform (you may also phone your orders in to our 24 hours trade desk).
All futures & options contracts have symbols which are used to identify the contracts you wish to trade. For WTI Crude Oil, the root symbols are…
As these are ‘futures’ contracts, they will be contract available to trade with different months & years. Many traders will choose to trade the most active month, also known as the “front” month as this will typically be the contract with the most trading volume.
When placing an order, you will identify the exact contract you wish to trade by appending the month and year codes to the root symbol. For example, if you wish to trade an August 2020 WTI Crude Oil futures contract, the full symbol will be: CL.Q20
In this example, CL is the root symbol (a period is then inserted), Q is the month code for August and 20 is the last two digits of the contract year. A period is always used between the root symbol and the month/year code.
When trading futures and options, you can either go long (buy) if you think prices will rise or go short (sell) if you think prices will drop.
To enter a futures contract trade, we will enter the following information into the trading platform.
• Number of contracts to be traded
• Trade direction – Buy 0r Sell
• Exact contract symbol – i.e. CL.Q20
• Order Type: Market, Limit or Stop
• Order Price (if Limit or Stop order)
• Order Duration: Day (current trading session) or GTC (Good Till Canceled)
Once your order has been entered, our trading platform will give you a ticket number for the order as well as a notification when the order gets filled. If/when the order is executed, you will then have either a long or short position depending on the Trade Direction you chose. You can modify or cancel any working order prior to it being filled or expiring.
Determining Profit or Loss:
The WTI Crude Oil futures contract trades in $0.01 price increments. As each contract is equal to 1,000 barrels of oil, a $0.01 price move equates to $10.00 ($0.01 x 1,000). If Crude Oil prices were to move up or down $1.00 per barrel, that would equate to $1,000.00 +/-.
For this example, let’s assume you went long (bought) one (1) August 2020 Crude Oil futures contract at a price of 33.10. If Aug’20 Crude Oil futures prices were to rise to 33.50, that would be a 0.40 gain or $400 (0.40 x 1,000). Conversely, if Aug’20 Crude Oil prices dropped to 33.05, that would be a 0.45 loss or $450 (0.45 x 1,000).
Please note, when calculating profits or losses, you must also take into account commissions and associated trade fees to determine your net profit or loss.
How much money do I need to trade?
When trading commodity futures contracts, the futures exchanges will set what are called Margin Requirements for each commodity. Margins in futures trading is NOT similar to margins in stock/equity trading. Think of margin requirements as a performance bond. The dollar amount you must have available in your account in order to trade one particular commodity futures contract. For example, the current, initial margin requirement for WTI Crude Oil is $9,900*. This means you must have a minimum of $9,900 in available funds in your trading account to position trade one WTI Crude Oil futures contract. Position trading refers to holding a futures contract for longer than one day (trading session).
In addition to Positions Trading there is also Day-Trading. Margin requirements for ‘Day-Trading’ will be lower than the full, initial margin requirement. Day-Trade margins are typically set at 25% or less of the initial margin requirement and allow futures traders to participate in a given futures contract just for the currents day’s trading session with less funds. For example, with the current full, initial margin requirement for WTI Crude Oil at $9,900, the current Day-Trade margin is $2,475 ($9,900 x 0.25). When Day-Trading, you must liquidate all open positions by the close of the current trading session or have the available funds in your account for the full, initial margin requirement to avoid a margin call.
*Please Note: Margin requirements are subject to change without notice from the futures exchanges.
Take the Next Step:
Open an account or learn more.
If you’re ready to get started trading commodity futures, the next step is to open your trading account. Click the following button to access our New Accounts web page…