Trading oil was only for the elite traders trading in the oil commodities market. These futures commodity markets used contracts that covered a minimum of 1000 barrels per contract. After a barrel of oil is “cracked”, broken down into gasoline and other petroleum items which can be made from a barrel of oil, 42 gallons of gas is collected. When you consider 42 gallons per barrel multiplied by 1000 barrels per contract, just think about the money you would need to be able to trade oil commodity futures. The world events of recent years have made the value of oil change at a very high rate.
Before the 1970’s oil prices stayed within a certain trading range. When the 1970’s came around all sorts of things changed for the oil trading market. World politics, global warming, hybrid cars, ethanol, technological advances and constant problems in the Middle East have all had their effect on trading oil. Prices have currently topped $100 per barrel and consumers getting gas on the pump feel it everyday.
The United States has generally been the most important consumer of oil and gas on this planet. However, that isn’t the case anymore. Many countries have developed more in the past few decades and at the moment are consuming more energy, and therefore more oil. India and China are probably the two countries that have increased their oil consumption the most. Because the demand for oil increases, so does the value and the rate of change of oil prices.
The common investors never really had a chance or the power to trade oil. Most traders were not acquainted with the futures market, or they did not have the capital required to open a commodity futures trading account. The commodities futures even have a very different type of trading style. Futures trade in contracts that expire after a certain time period. A typical form of an oil futures contract would be: 1 contract of december 80 oil. That may mean you’re buying a contract that may let you purchase 1000 barrels of oil at 80 per barrel in December. When December rolls around you either sell the contract or let it expire worthless if oil is trading at less than $80 per barrel. It isn’t like a stock from IBM that you simply just hold forever.
Exchange Traded Funds (ETF’s) have now been created to track almost every commodity that was once only traded within the futures markets. The USO is the ETF that tracks the oil market. Average investors can now buy and sell the USO ETF like they might another stock. Since the USO is traded like a stock, you may as well trade options on it. Puts, calls, covered calls and all the opposite option trading strategies can now be used on the highly volatile price of oil.