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Oil options trade ideas: daily, weekly and monthly option

After oil pulls back on the impact of the coronavirus, how can you use options to get exposure to the markets?

Oil options trade Source: Bloomberg

The impact of the coronavirus on global markets has been significant, notably impacting oil prices and other similar distillates. This was largely expected – simple supply and demand dictates that as economic activity and oil-hungry transport decreases (both flights in and out of China as well as domestic travel in the region) the demand for oil reduces. This in-turn pulls down the oil price.

We’re currently at a crossroads where the oil price has pulled back significantly, and the markets are understanding the impact of the virus a little better. You can see on the weekly chart below, where each candle stick indicates a weeks’ worth of price action, that we’ve had a significant pull back, but regained a little ground to put WTI around the $52.00 handle.

There could be a trade in oil over the coming days and weeks which we can explore in more detail. Rather than just trade a regular spot market let’s look at daily, weekly and monthly options.

US crude oil Source: IG Charts
US crude oil Source: IG Charts

A note about options

The below trade ideas assume an understanding of what options are, and more importantly of how you trade them with IG. We will assume an understanding of payoff diagrams, how they settle, and profit and loss calculations. If you’re reminding yourself of the IG options offering it may be worth reading this quick overview of how to use the options chain.

The strategies we’ve outlined below can be traded on any expiry, however for the purposes of the examples we’ve linked them to a particular expiry.

Oil daily options trade idea

There are many advantages to trading our daily options. Most importantly they generally give you greater control over your leverage and risk, whilst maintaining low spreads. For those who hold until expiry there is also no spread on the closing leg.

If you think the market will go up, you would buy a daily call. If you think the market is going to go down, you would buy a daily put option. Let’s have a look at an example.

If you’re bullish on the oil market, buy a daily call option. There are several strikes you can choose from depending on your personal risk profile, but in this example, we’re going to look at the 5040 strike.

At the time of writing, the premium for the 5040 strike is 167.1 points which happens to have a delta of 1. This means the premium will move 1 for 1 with the underlying market. Delta refers to the rate of change in the premium price in relation to a one point move in the price of the underlying. It’s an important factor which makes up the premium price, but if needed you can remind yourself of other options Greeks here.

US Crude daily

If the market were to rally, a long call option premium would likely increase. In the case of delta 1 options they’d move 1 for 1 with the underlying oil price, so a 40 point move (for example) in the underlying would cause that premium to go up (to 207.1) or down (to 127.1).

As noted above, if you think the market will go down, then you could buy a daily put. With all options at IG you can trade in and out of these as you see fit – there is no need to hold until expiry.

Oil weekly options trade idea

Sometimes during important macro events, and after a period of consolidation, you may think there will be a large move one way or the other in the price of a market, but you don’t know which direction it will be. After the effects of coronavirus, the price of oil is at a key level of support and is a

perfect example of this. You want to make a trade, but don’t know which way the market will go. In this instance you could ‘buy volatility’.

One way to do this is to buy a call and a put at the same strike ‘at the money’ – this is known as a straddle. The only problem with this is that the premiums to open this trade could be larger than what you’re willing to risk.

An alternative strategy would be to buy a call and a put at different strikes to form an option strategy known as a strangle. As both the call and the put are slightly more ‘out of the money’ they will be cheaper. However, you would need greater volatility for the strategy to become profitable.

You would buy a strangle if:

  • You thought there was going to be a volatile movement one way or the other, but you didn’t have an opinion on the direction of the move
  • You wanted to pay less to open, and were confident that market movement would be volatile enough to make your trade profitable

You can remind yourself of both of these types of options strategies on our main page.

Oil monthly options trade idea

If you had a longer-term view on the oil price, then you could trade our monthly expiries. In this example we’re going to show a long call spread option strategy.

You would trade this if you thought the oil price was going to rise, but not too much. It’s a limited risk trade, however the profits are also limited. This may sound counter intuitive, but you’re hoping the market will stay within a certain range, and you’ll receive the premium by selling the call option at a higher strike than the bought call.

Let’s assume the oil price is $52.00, and you think the market will rally, but not past $53.50. You would:

  • Buy a 5250 call option
  • At the same time sell a 5350 call option

Buying the call would profit if the underlying market rallies, however selling the higher strike 5350 would flatten the topside profit. This ultimately makes the strategy cheaper, which provides some compensation if the market doesn’t rise above the 5350 level.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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