Oil Prices and Your Options Trading

Energy markets have been in a state of flux ever since Russia invaded Ukraine, the EU, USA, and others imposed sanctions on Russia, and countries like India have helped Russia get around sanctions by purchasing oil at a discount. Western sanctions on Russia were recently ratcheted up a notch causing more oil market turmoil. Meanwhile energy traders are having a field day trading the ups and downs of the energy market. The most recent events are that an EU embargo of seaborne oil imports went into effect while OPEC and Russia agreed to keep production at current levels. All of this drives both oil prices and your options trading. The Group of 7 countries meanwhile has agreed to a $60 per barrel price cap on Russian oil at the same time that China appears to be easing its Covid restrictions.

Effect of Oil Price on the Economy

Oil prices affect the US economy in two ways. When the price of oil goes up and stays up that drives investment and job creation in the energy industry. Some oil and gas fields are only profitable to extract from when prices are high so high oil prices bring these fields online. At the same time high oil prices hit consumers and virtually every business with increased expenses. Higher costs of heating, cooling, manufacturing, and transportation drive inflation higher.

Oil Prices and Options Trading

An options trader can trade options on commodity futures for natural gas or crude oil. They can also trade stock options on companies in the energy sector. Another possibility is to simply trade options on the SPX as high energy prices tend to depress the economy. When trading options the trader is not like a long term investor who is looking at where the sector will be in five or ten years. Rather the options trader is concerned about how market sentiment will be driven by things like Chinese Covid lockdowns or China getting back to work and driving oil prices up. In options trading we watch how the Fed handles interest rates and one of the reasons why is the when the Fed overshoots, they drive the country into a recession which reduces demand for oil and natural gas and thus drives prices down.

Foreign Wars and the Oil Market

At Top Gun Options we use our DRINC acronym to remind ourselves that events on the far side of the world come back to affect markets in the USA. The D in DRINC stands for Russia and their unprovoked war on Ukraine has helped drive energy prices up along with a raft of commodities like wheat, corn, fertilizers, etc. The war is driving oil and natural gas prices and therefore a change in the war will come around to improve or worsen oil prices and their effects across the economy. The EU and USA say they will cap Russian oil purchases at $60 a barrel as a way to put more pressure on Russia to get out of Ukraine and to ease the effects of high energy prices on the European economies.  A factor that options traders will want to pay attention to is how willing Europeans are to keep supporting Ukraine as their nations start rationing energy in the depths of the winter.

Options Profits in High and Low Oil Markets

As we routinely point out here at Top Gun Options, options markets and strategies provide the trader with the ability to make money no matter which way equity prices are going. We demonstrated that clearly when we printed money and made millionaires during the Covid crash. Today as oil prices fluctuate it can be difficult to know which strategies to employ. Consider joining one of the trading squadrons at Top Gun Options where we potentially print money no matter which way markets are going.