WTI Crude Oil Options are derivative financial contracts that grant the holder the right, but not the obligation, to buy or sell a specified quantity of West Texas Intermediate (WTI) crude oil at a predetermined strike price on or before a specific expiration date. These instruments allow for speculation and hedging against oil price movements.
Mechanism
Traders purchase call options if they anticipate an increase in WTI crude oil prices or put options if they expect a decrease. The value of these options is derived from several factors, including the price of the underlying WTI crude oil futures, market volatility, time remaining until expiration, and prevailing interest rates. They trade on regulated commodity exchanges.
Methodology
The methodology involves utilizing options for various strategic purposes, such as hedging existing physical oil positions against adverse price changes or speculating on future price direction with defined risk. It enables market participants to manage exposure to energy market volatility and to create tailored risk-reward profiles. This includes strategies like spreads, straddles, and covered calls.
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