Heating Oil Futures

Futures Options and Spreads

5
Jul0

Please only use these future option examples for educational purposes.
Paper trade them.

I normally write about spread options. Today I want to first take a look at a futures spread. Let’s look at a natural gas/heating oil spread. This is buying one natural gas futures and selling one heating oil futures.

Below are daily, weekly and monthly charts:

Daily
http://deltaneutraltrading.com/062709.bmp

Weekly
http://deltaneutraltrading.com/062709b.bmp

Monthly
http://deltaneutraltrading.com/062709c.bmp

You can trade this as a spread using options. You do not have to just buy and sell the futures. You can buy a call and buy a put instead so you are limited in your potential loss. Even though futures spreads can have less risk, there is still the possibility of unlimited losses.

With buying options, you are limiting the risks. You no longer have unlimited loss potential. But the problem is that you are buying premium. So instead of just buying options, you can buy and sell credit spreads.

For example, from looking at the above chart, we can buy an at the money natural gas call option and sell a natural gas out of the money call. Then we sell an at the money heating oil call option and buy an out of the money heating oil option. We expect the natural gas futures to rise in comparison to the heating oil futures because of the chart.

I go over these types of option spreads in my course. And I look at some market combinations that you might not have thought of. Don’t just use these for the obvious spread markets like, wheat/corn, t-bond/t-note. There are other market combinations for spreads and other ways to come up with the option spreads. You can create a spread using more than one market instead of just two markets. You can also create option combinations that are not typical credit or debit spreads. Think outside the box with commodities options.