What is Oil & Gas?

Investors looking to enter the oil and gas industry can quickly be overwhelmed by the complex jargon and unique metrics used throughout the sector. This introduction is designed to help anyone understand the fundamentals of companies involved in the oil and gas sector by explaining key concepts and the standards of measurement.

Oil and gas are less dense than water, so they migrate through porous sedimentary rock toward the earth's surface. When the hydrocarbons are trapped beneath less-porous cap rock, an oil and gas reservoir is formed. These reservoirs of oil and gas represent our sources of crude oil and gas. Crude oil options are the most widely traded energy derivative on the New York Mercantile Exchange (NYMEX), one of the largest derivative product markets in the world. The underlying asset for these options is not actually crude oil itself, but crude oil futures contracts. Thus, despite the name, crude oil options are in fact options on futures. Both American and European types of options are available on NYMEX. American options, which allow the holder to exercise the option at any time over its maturity, are exercised into underlying futures contracts. For instance, a trader who is long on American call/put crude oil options takes long/short position on the underlying crude oil futures contract.

Investors, speculators, and hedgers can use options in the oil market to gain the right to purchase or else sell physical crude or crude futures at a set price before their options expire.

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Traders who seeks downside protection in crude oil trading may want to trade crude oil options that are traded mainly on the NYMEX. In return for a premium paid upfront, oil option holders obtain non-linear risk/return not normally offered by futures contracts. Additionally, long options traders do not face margin calls that require traders to have enough liquidity to support their position. BullMarkers is an optimal for traders who prefer cash settlements.


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