http://www.options-trading-education.com/6522/buying-puts-on-oil/ Buying Puts on Oil As the worldwide economic picture becomes progressively more bleak buying puts on oil may be profitable. Crude oil prices fell again as the severity of the economic mess in Europe sinks in. The fall came just a day after enthusiasm over new stimulus plans in Europe drove prices up. Brent crude is now below $100 a barrel and NYMEX crude sits around $87 a barrel. Those who plan on buying puts on oil futures are looking at the fact that the US manufacturing expansion reversed itself for the first time in 35 months. Despite repeated efforts to control debt in Europe the austerity measures favored by Germany only seem to be sending the Euro Zone back into recession. Although the Euro Zone austerity or growth debate may, in fact, end up on the side of stimulus and growth it may be awhile before the European economy starts moving again. That will mean stagnant of lower oil prices. And that implies that buying puts on oil will be profitable in the short and medium term. Buying Options In options trading the buyer of an options contract pays for the right to buy or sell an underlying equity on or before the expiration date of the contract. Calls confer the right to buy and puts confer the right to sell. An options contract does not put the buyer under any obligation to do either. In the case of buying puts on oil the options trader buys an options contract giving him the right to buy an oil futures contract for a specific date at a specific price, referred to as the strike price. He does so because he believes that the market price, called the spot price, will fall over the course of the options contract. His profit will be the difference between strike and spot price. His only loss will be the price of the contract in the case that his prediction does not hold true. Buying puts or calls on oil futures costs money but has limited risk Selling puts or all can be profitable but entails the risk of an occasional but substantial loss. What Will Commodity Prices Do? As central banks, especially in Europe, came forward again with stimulus measures many commodity traders started buying futures on industrial metals such as copper, precious metals such as gold, and oil in the expectation that an economic recovery would drive prices up. The problem is that, although stimulus measures may well work in the long run there is a while to go before we see a truly recovering global economy. As such, when traders step back and look at the big picture they expect to see lower commodity demand and lower commodity prices. They start selling their futures contracts and to the extent that they stay in the market they start buying puts on oil, copper, and other industrial commodity futures. Those trading gold options opt for puts as well. Issues that threaten to drive up oil prices include threats by Iran to close down Persian Gulf shipping, general unrest in the Middle East.