Buying Oil, how best to do it ?
Discussion
My position is that Oil is absurdly low right now, it has been forced down below its real value by geopolitics and everyone involved is hurting and it will have to come back up eventually.
How can I best capitalise on this ?
I want to limit my risk to £10,000. I want to take a long position, happy to wait 12 months.
I usually buy technology stocks, I have not dabbled in commodities before.
I have been playing with Options via a demo trading account, there seems to be many problems taking a long position.
However I am tempted to simply buy a small position to limit my total overall risk. And as oil is just so low, I think this is doable :
For example Brent Crude is currently at 3114.
If I buy in at £4 per point my total risk is limited to 12,456, and probable total risk ( oil would not hit zero ) would be more like 10,000.
Margin on oil is 1% so I would only need £124 deposited to make the worst case margin requirement.
If Oil were to go back up to 12000 total profit would be 35544. If were to go back up to 10,000 ( the level it has been trading around for 10 years ) it would be 27540. ( of course I would not make this total amount, you would have to minus the interest on the position and the brokerage fees. )
Have I made any errors in my maths ? Do I understand the situation correctly ?
Of course I could instead look to buy 10,000 pounds worth of shares in oil companies that I consider undervalued, but I don't know much about oil companies so would not likely realise the full value.
How can I best capitalise on this ?
I want to limit my risk to £10,000. I want to take a long position, happy to wait 12 months.
I usually buy technology stocks, I have not dabbled in commodities before.
I have been playing with Options via a demo trading account, there seems to be many problems taking a long position.
- Daily charge for the interest as it is essentially a leveraged position
- Vulnerable to the sudden temporary downwards movements, possibly triggering a Margin call and resulting in liquidation of my account.
- multiplication of risk.
However I am tempted to simply buy a small position to limit my total overall risk. And as oil is just so low, I think this is doable :
For example Brent Crude is currently at 3114.
If I buy in at £4 per point my total risk is limited to 12,456, and probable total risk ( oil would not hit zero ) would be more like 10,000.
Margin on oil is 1% so I would only need £124 deposited to make the worst case margin requirement.
If Oil were to go back up to 12000 total profit would be 35544. If were to go back up to 10,000 ( the level it has been trading around for 10 years ) it would be 27540. ( of course I would not make this total amount, you would have to minus the interest on the position and the brokerage fees. )
Have I made any errors in my maths ? Do I understand the situation correctly ?
Of course I could instead look to buy 10,000 pounds worth of shares in oil companies that I consider undervalued, but I don't know much about oil companies so would not likely realise the full value.
sideways sid said:
I think you have answered your own question pretty well.
It sounds like you're using a spreadbetting account, and your maths looks right.
Oil's up >6% now since opening an hour ago, so your position would have increased in value by over £700. Before the cost of the spread of course.
Another alternative is to buy Call Options, which you can also do with some spreadbetting accounts, but you need to do some homework to understand how they work. Buying a spreadbet on the price, as you suggest, is more straightforward.
Yes it is a spread betting account. It sounds like you're using a spreadbetting account, and your maths looks right.
Oil's up >6% now since opening an hour ago, so your position would have increased in value by over £700. Before the cost of the spread of course.
Another alternative is to buy Call Options, which you can also do with some spreadbetting accounts, but you need to do some homework to understand how they work. Buying a spreadbet on the price, as you suggest, is more straightforward.
Yes it almost painful watching oil rise today, but it looks like there have been lots of "dead cat bounces" on the way down to its current position so I don't actually trust it is a real rally.
I want to do it this way, as you normally don't see a commodity trade at 30% of its potential value. Usually doing it this way would have more risk than reward, but as it is so low the position is reversed....I haven't seen an opportunity quite like this before.
I am open to any method as long as risk can be kept under control. Normally I just buy "straight" stocks and hold them for years so I am a newbie at this game, and it is a very dangerous game for a newbie.
fido said:
ExPat2B said:
I am open to any method as long as risk can be kept under control.
Good luck with that .. oil is incredibly volatile .. I found limiting the £/point is key to this. Stop losses are useful but will cost you (in more ways than one).If the price were to temporarily dip to 10$ which some people are predicting....that would leave me with a £8456 Margin, would be required to deposit £8456 in my trading account plus any interest payments daily on the position until the price recovered ?
Do I understand correctly ?
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