Heating Oil Futures Option Trading primer

Heating Oil futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of heating oil (eg. 42000 gallons) at a predetermined price on a future delivery date.

You can trade Heating Oil futures at New York Mercantile Exchange (NYMEX).

Consumers and producers of heating oil can manage heating oil price risk by purchasing and selling heating oil futures. Heating Oil producers can employ a short hedge to lock in a selling price for the heating oil they produce while businesses that require heating oil can utilize a long hedge to secure a purchase price for the commodity they need.

Heating Oil futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable heating oil price movement. Speculators buy heating oil futures when they believe that heating oil prices will go up. Conversely, they will sell heating oil futures when they think that heating oil prices will fall.

If you are bullish on heating oil, you can profit from a rise in heating oil price by taking up a long position in the heating oil futures market. You can do so by buying (going long) one or more heating oil futures contracts at a futures exchange.

Example: Long Heating Oil Futures Trade

You decide to go long one near-month NYMEX Heating Oil Futures contract at the price of USD 1.4777 per gallon. Since each NYMEX Heating Oil Futures contract represents 42000 gallons of heating oil, the value of the futures contract is USD 62,063. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 10,125 to open the long futures position.

Assuming that a week later, the price of heating oil rises and correspondingly, the price of heating oil futures jumps to USD 1.6255 per gallon. Each contract is now worth USD 68,270. So by selling your futures contract now, you can exit your long position in heating oil futures with a profit of USD 6,206.

Margin Requirements & Leverage

In the examples shown above, although heating oil prices have moved by only 10%, the ROI generated is 61.2972 percengt. This leverage is made possible by the relatively low margin (approximately 16.3140 precent) required to control a large amount of heating oil represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.