Investing in oil stocks is an attractive way to diversify away from the overall market. Another alternative that is now available is trading an oil ETF. It is a low cost way for the average investor who doesn’t trade commodities to take a position in the oil market. Here’s a look at how the oil ETF trades.

Average Investors Can Now Trade the Oil Market
By Dennis Graves

Trading oil used to be only for the elite traders trading in the oil commodities market. These futures commodity markets used contracts that covered a minimum of 1000 barrels per contract. After a barrel of oil is “cracked”, broken down into gasoline and other petroleum items that are made from a barrel of oil, 42 gallons of gas is collected. When you consider 42 gallons per barrel multiplied by 1000 barrels per contract, just think about the money you would need to be able to trade oil commodity futures. The world events of recent years have made the price of oil change at a very high rate.

Before the 1970’s oil prices stayed within a certain trading range. When the 1970’s came around all types of things changed for the oil trading market. World politics, global warming, hybrid cars, ethanol, technological advances and constant problems in the Middle East have all had their effect on trading oil. Prices have currently topped $100 per barrel and consumers getting gas at the pump feel it everyday.

The United States has generally been the largest consumer of oil and gas in the world. However, that is not the case anymore. Many countries have developed more in the past few decades and are now consuming more energy, and therefore more oil. India and China are probably the two countries that have increased their oil consumption the most. As the demand for oil increases, so does the price and the rate of change of oil prices.

The common investors never really had an opportunity or the ability to trade oil. Most traders were not familiar with the futures market, or they didn’t have the capital required to open a commodity futures trading account. The commodities futures also have a very different type of trading style. Futures trade in contracts that expire after a certain period of time. A common form of an oil futures contract would be: 1 contract of december 80 oil. That would mean you are buying a contract that will let you buy 1000 barrels of oil at 80 per barrel in December. When December rolls around you either sell the contract or let it expire worthless if oil is trading at less than $80 per barrel. It’s not like a stock from IBM that you just hold forever.

Exchange Traded Funds (ETF’s) have now been created to track almost every commodity that used to be only traded in the futures markets. The USO is the ETF that tracks the oil market. Average investors can now buy and sell the USO ETF like they would any other stock. Since the USO is traded like a stock, you can also trade options on it. Puts, calls, covered calls and all the other option trading strategies can now be used on the highly volatile price of oil.

Dennis Graves has been investing in the stock market since the early 90’s. While mostly investing in options, he also has experience in daytrading, swing trading, penny stocks and long term trading. He has also created many stock market trading sites, most recently http://www.TradeTheUSO.com which is a site devoted to trading the USO through stocks and options.

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