Are you familiar with NYMEX oil futures? Do you know what they are, and why they are there? If you are a car owner, you better be, because this financial instrument decodes the price you have to pay for a gallon of fuel at the station. Instead of complaining about soaring prices at the station, you could also be the one profiting at the trading floor.
The New York Mercantile Exchange (NYMEX) is the largest physical commodity futures exchange in the world. The leading traded oil future is the 'Light Sweet Crude Oil' since this is the most wanted form of crude oil. It is used to process into gasoline, kerosene, and high-quality diesel. The price of the sweet crude oil future at the NYMEX can be seen as the leading price for oil producers and consumer around the world, such as airlines and refiners.
The oil futures traded at the NYMEX are contracts with a delivery date in the next month. Each contract is 1,000 barrels, or 42,000 gallons. The contracts are traded for 23 hours and 15 minutes each day from Monday to Friday electronically (with a break from 5:15 PM to 6:00 PM), and from 9:00 AM until 2:30 PM in the open outcry, also called the pit session. The open outcry is one of the few places left where buyers and sellers trade by hand signs, signals and shouting out loud.
Most private individuals are not able to buy a whole contract, since a 1,000 barrels of $ 70 each would require the individual to bring in $ 70,000 for just one contract. Fortunately, there is a way to trade oil with as little as $ 100. Internet brokers offer leverage to make this market accessible to the regular man in the street. Some brokers offer leverage for oil trading up to 1: 100. This means that for every dollar the price of oil goes up, your profit will be $ 100. Obviously, these works in two ways, so a price decrease of $ 1 results in a loss of $ 100. Because of this leverage, you are not buying a virtual 1,000 barrels, but only 10.
Making the market even more accessible, you only have to bring in the amount of money that you are taking a risk for. So lets say you buy a contract at the price of $ 75 because you think the price will go up. But since you want to limit your risk, you set your stop loss at $ 70. This means that whenever the price hits $ 70, your oil futures will be sold and you will have to take the loss of $ 5 per contract. Since this is the maximum you can loose, you do not have to pay the $ 75 for each contract when you make the trade, but only $ 5.
By combining these two mechanisms, you can suddenly enter the oil futures trading market with as little as $ 100. Find yourself a good broker, deposit some money, and you are ready to go. It's as easy as that. So next time those prices at the gas station make you angry, think about the possibility to be on winning side next time, and start trading oil futures!
