Crude Oil Option Price
The futures crude oil price, and the crude
oil option price is not the same thing. Option price valuation is not as straightforward as futures valuation. Option
premium is comprised of intrinsic value and extrinsic value.
An option has intrinsic value if the market is trading above the strike price of a call
option, or below the strike price of a put option. If an option contract has intrinsic value it is called “in
the money.” If an option contract does not have intrinsic value it is called “out of the money.”
If crude oil is trading at
$50, a $47 call option is $3 in the money so the intrinsic value of the option is $3,000.
The extrinsic value of the option is its “time
value.” Extrinsic value takes into account the possibility that an option may go in the money by expiration. The more
time that an option has, the more extrinsic value it has. As an option approaches its expiration date it loses value. This
is called time decay. At expiration an option has no extrinsic value so if the option is out of the money it expires worthless.
Crude Oil option prices do not move
in tandem with futures prices. A $1 move in your favor in the crude oil futures markets does not necessarily equal to a $1
increase in the crude oil option value. The amount that an option value will increase based upon an increase in its futures
price is called its delta. Call option deltas are measures from 0 to 1. As an option goes from “out of the money”
to “in the money” its delta increases.
If a crude oil call option has a delta
of .5 and the price of the crude oil futures market increases by $1 the value of the option will increase by $.5 or $500.
If you are a speculator with a limited amount of risk
capital then crude oil options may be best way for you to invest in the crude oil market.