How to take advantage of oil market volatility

Volatility in the oil market is a valuable opportunity for traders to make profits, especially if they anticipate how the markets will move. Volatility in the oil market is defined as a measure of the change in a financial asset’s price in either direction, up or down. If the trader expects the fluctuation of oil by 10% and the current oil price is $ 60, this means that during the following year, the trader expects the price of oil to change by 10%, meaning it will become $ 45 or $ 75.

The year 2021, since its inception, has carried historical fluctuations in the oil, and experts expect higher fluctuations in its prices shortly. If the current volatility is less than the long-term average, then traders expect less price volatility in the future.

Trading in a volatile oil market

Traders can easily take advantage of the volatility of the oil market by utilizing a derivative trading strategy, which is done by buying and selling futures positions on exchanges that offer crude oil derivatives. This buying volatility strategy is called a “long-term strategy,” resulting in a profit from increased volatility. This strategy becomes very profitable if the oil market experiences significant movements in both the upside and the downside.

The selling strategy in light of the oil market fluctuations is called the “short term strategy.” This strategy becomes very profitable if the price of oil assets is range-bound.

Also, in the case of oil market volatility, another strategy that uses options outside of the money range is called “short choke,” which reduces the potential profits but increases the capacity in which the strategy becomes profitable.

Bearish and Bullish Strategies

A bearish trading strategy in the oil market consists of selling one out of the money position and buying another out of the money. The difference between these two operations is the maximum profit this strategy can bring. The maximum loss is the difference between the strike price and the net credit amount. This strategy can also be used to sell an out-of-money position and buy an out-of-money position.

A bullish trading strategy in the oil market consists of buying a position outside the money and selling another position outside the money range. The difference between the two operations is the net discount amount, which is the maximum loss this strategy can reach. The maximum profit is the difference between the strike prices and the net discount amount. This strategy can be used with put options by buying an out-of-money position.

Conclusion

Traders can benefit from the fluctuations in oil market prices just as they can benefit from stock price fluctuations. This profit is achieved by using derivatives to leverage the leveraged exposure of the financial asset in oil without owning the asset itself.

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د. مرهف العطاسي

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