Crude Oil Volatility Trading Strategies

Crude oil has high liquidity and great openings to profit in most market conditions as a result of its unique relationship with the world’s political and socio-economic systems. In addition, the volatility of the energy sector has advanced rapidly in recent years, leading to strong trends of steady returns for long term “market timing” strategies and short term “swing trades”.

Traders regularly fail to take advantage of the fluctuations in crude oil prices due to the fact that they might be unaware of the exclusive features of this market or because they are oblivious of the market’s hidden dangers and subsequently lose profit.

Whether you are an experienced or first-time trader, this article will help you make potentially some profits from trading crude oil by implementing the following trading strategies.

Due to the recent volatility in oil prices, if a trader is able to predict the right direction of the price, then there is a great chance for them to make profit.

Traders can take advantage of volatile crude oil prices with the use of derivative strategies. These strategies comprise of concurrently taking positions in futures contracts and buying and selling options on any exchanges offering derivative products of crude oil. “Long straddle” is the so-called strategy of buying volatility or benefiting from a rise in volatility. This strategy comprises of buying a put and a call option at exactly the same price and it becomes profitable when there is a substantial move in a downward or upward direction.

If oil, for example, is currently trading at US$85 and the call and put option strike prices are $8 combined, then the strategy is profitable if there is a $8 movement in the oil price. So, if the oil price increases past $93 or drops past $77 then the strategy will result in profits.

“Short straddle” is the so-called strategy of selling volatility or benefiting from a decrease in volatility (or steady volatility). It comprises of selling a put and a call option at exactly the same price. “Short straddle” becomes profitable when the price is moving within a tight range for a period of time.

If oil, for example, is currently trading at US$85 and the call and put option strike prices are $8 combined, then the strategy will yield profits when there is no more than a $8 movement in oil price. So, if the price of oil rises up to $93 or drops up to $77 then this strategy will be profitable.

These strategies can function in both directions and therefore, if the person who is trading has in mind the oil prices, they can apply spreads that can give them the opportunity to profit and simultaneously limit any risks.

“Bear call spread” is a well-known bearish strategy which comprises of selling an OTM call, and buying an even further OTM call. The maximum profit for this strategy is the net credit amount and difference between the net credit amount and the strike prices is the maximum loss for this strategy.

A parallel bullish strategy comprises of buying an OTM call and selling an even further OTM call and is called the “bull call spread”. The maximum loss for this strategy is the net debit amount and the difference between the net debit amount and the strike prices is the maximum profit for this strategy.

Therefore, by using these derivative strategies, traders can potentially profit from the volatile prices of oil similarly to stock prices.

With knowledge about crude oil trading strategies you can open an STO account that gives you access to MT4, one of the industry’s leading forex trading platforms, and start trading today. Click on the link above for more information.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice. FX and CFD trading are high risk and may not be suitable for everyone, ensure you fully understand the risks. You may sustain a loss of some or all of your invested capital.