As Asia and developing economies continue to demand and provide subsidies for oil and energy purchases, the West will continue to pay more for oil. Besides runaway speculative demand, this issue is one of the primary sources of blame for high oil prices and the fact that forecasters are pointing to for even higher prices.
[VIDEO] Trading Oil with Index Options
This is certainly painful but there are ways for stock option investors to take advantage of higher oil prices. This is good because we can not only profit from higher oil prices but also hedge against prices at the pump. That means that if you are earning more in the market, you are offsetting, to a certain extent, higher prices as you fill up your Prius or Yukon.
One way to approach this in a standard stock options account is with the CBOE Oil Index (OIX), the index is comprised of a weighted average of oil services companies like British Petroleum (BP) and Exxon (XOM). As you can see in the chart, the index rises as oil prices are on the run and falls as energy prices decline.
The OIX has options available for up to 5 months in the future. The OIX also has European style expiration so there is no “early exercise” to worry about. In the video, we walk through a sample trade on the OIX to illustrate a couple of ways that this index can be used by an options trader. You will see how this option may fit within your own investment portfolio as a way to profit from higher energy prices and offset costs at the pump.