The Chicago Mercantile Exchange (CME) is a global leader in derivatives trading. West Texas Intermediate (WTI) crude is one of the most popular CME offerings. WTI, listed as a benchmark futures and options contract, is the global benchmark for trading light sweet crude.
For aspiring energy traders, understanding the specifications of WTI crude oil contracts is imperative. In this blog post, we’ll detail the trading basics of these exciting derivative markets.
West Texas Intermediate Crude Contracts and Options Specifications of Crude Oil Contracts
In the world of active trading, WTI futures and options are very popular products. No matter if you are interested in speculating on price movements or hedging risk, CME WTI futures and options can help you.
WTI Crude Oil Futures Contract
West Texas Intermediate crude futures contracts are an excellent barometer of global oil trade. First launched by the New York Mercantile Exchange (NYMEX) in 1983, the West Texas Intermediate crude futures contract is the derivative product of trading in light sweet crude oil.
In March 2008, CME Group acquired NYMEX and WTI Crude Oil Management. With a robust average daily trading volume of nearly 1.2 million contracts and an open interest of up to 2 million contracts, the CME listing provides maximum liquidity. Here are the specifications of the West Texas Intermediate crude oil contract as per the Chicago Mercantile Exchange:
|Pricing||Dollars and cents per barrel|
|tick size||1 tick = 0.01 dollars per barrel|
|Retail value||1 tick = $10.00|
|Listed Contracts||Contracts are listed monthly for 10 calendar years and 2 months|
|Expiration||Trading ends three working days before the twenty-fifth day
From the calendar month preceding the decade
West Texas Intermediate crude oil options
A WTI options contract gives its holder the right – but not the obligation – to buy or sell a specified amount of crude oil at a pre-determined price on a future date in time. WTI oil options are known as “futures options” because the WTI futures contracts are the basis for contract valuation.
Below are the specifications of the WTI options contracts:
|Pricing||Dollars and cents per barrel|
|Minimal price fluctuations||0.01 dollars per barrel = 10.00 dollars|
|Listed Contracts||Contracts are listed monthly for 10 calendar years and an additional 2 months|
|Expiration||Trading ends seven working days before the twenty-sixth day of the month preceding the contract month|
Compared to standard futures contracts, options contracts are more complex. Here is a brief introduction to the basics of crude oil options:
- strike priceThe strike price is the price at which an option can be bought or sold at expiration.
- a callA call option gives its holder the right to buy a WTI futures contract at a strike at a timely upcoming date.
- PutsA put option gives its holder the right to sell the WTI futures contract at a strike at an upcoming date in time.
- Buy: When you buy WTI calls or sell puts, you pay a premium for a bullish (buy) or bearish (sell) position in the market. The risks are limited to the premiums paid, and the profits are likely unlimited.
- Sell: When you sell or place WTI calls, you get a premium for “writing” the contract. The revenue is generated from the sale, but your risk is potentially unlimited.
For options traders, the important specifications of the WTI Crude Oil contracts are the quantity and the strike price. As the number of contracts bought or sold increases, so does market exposure and risk.
Also, the location of the strike relative to the current price of WTI is vital to the success of the trade. Call values depend on the relationship of the market price to the strike. Money (ITM) and exchange rate (ATM) contracts typically have lower assumed risk and higher premiums than non-monetary (OTM) contracts.
Putting WTI futures and options at your finger tips
The first step in successfully trading any market is understanding the basics. For energy traders, it is essential to have a working knowledge of the WTI Crude Oil futures and options contract specifications.
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