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Heating Oil Futures and Options Education
Heating oil futures and options quick facts:
The History of Heating Oil and Heating
Oil Futures Market
The market for heating oil, also known as
No. 2 fuel oil, grew rapidly after World War II, as
homeowners and builders switched from coal. Heating oil very
similar in chemical makeup to diesel fuel.
With the lifting of U.S. price controls
on heating oil in the mid 1970's, the New York Mercantile
Exchange (NYMEX) began developing a heating oil futures
contract and, in 1978, introduced the world's first
successful energy futures contract. Most of the heating oil
consumed in the US is used in the Northeast.
Heating Oil accounts for almost 25% of the yield of a barrel
of
crude oil, the second largest
"cut" of the barrel after
unleaded gasoline.
Heating oil futures
has become one of the premiere distillate contracts in
future trading. During the September terrorist attacks on
the World Trade Center the NYMEX was destroyed but within 3
days the heating oil futures
and heating oil options contracts were being traded again.
This is a testament to the strength and viability of the
energy future markets.
NYMEX Division heating oil futures contract mainly attracted
wholesalers and large consumers of heating oil in the New
York Harbor area. Soon, its use spread to geographical areas
outside of New York and it came apparent that the contract
was also being used to hedge diesel fuel, which is
chemically similar to heating oil, and jet fuel, which
trades in the cash market at a usually stable premium to
NYMEX Division heating oil futures.
Today, a wide variety of businesses,
including oil refiners, wholesale marketers, heating oil
retailers, trucking companies, airlines, and marine
transport operators, as well as other major consumers of
fuel oil, have embraced this heating oil futures contract as
a risk management vehicle and pricing mechanism.
Who Uses the NYMEX
Division Heating Oil Futures Contract?
The
NYMEX Division heating oil
futures contract can help most
sectors of the oil industry -- refiners, wholesales
marketers, and retailers ---take advantage of market
opportunities or meet the challenges presented by
ever-changing conditions in the physical market.
Full-service fuel oil distributors are active users of the
heating oil futures
and heating oil options contracts. Typically, a full-service
dealer will protect a portion of his winter delivery
commitments through the purchase of Exchange-traded heating
oil futures and options. This enables a fuel oil dealer to
offer a "guaranteed" delivery price, where customers are
assured a set price for their annual consumption of fuel
prior to the beginning of the winter season. The fuel oil
dealer hedges these guaranteed price agreements by
purchasing Exchange heating oil futures or heating oil
options contracts, or by purchasing a wholesale supply deal
which ties terminal cash prices to Exchange heating oil
futures prices.
Wholesalers also use the NYMEX Division
heating oil futures
and heating oil options contracts to protect physical
inventories and to hedge forward purchases of barge or
pipeline supply.
Large commercial users of heating oil and
transportation fuels use the NYMEX Division heating oil
futures contract to hedge against increases in the cost of
diesel fuel, jet fuel, and No. 2 fuel oil. Outside of the
oil industry, a wide variety of businesses, including
trucking companies, airlines, marine transport operators,
and other major consumers have embraced the heating oil
futures contract as a risk management vehicle for pricing,
budgeting, and hedging distillate fuel.
Traders can also use the NYMEX Division
heating oil futures
and gasoline futures contracts in tandem with crude oil
futures to lock in the "crack spread" or theoretical
refining margin.
As a protection of falling cash market
prices, producers, traders, and marketers can sell heating
oil futures to lock in prices for future delivery, and thus,
protect the value of future heating oil sales.
Since NYMEX Division heating
oil futures and heating oil
options are traded over 18 consecutive months, traders can
implement hedging strategies that encompass two winter
heating seasons.
Options Defined
The NYMEX Division heating oil options
contract, introduced in 1987, complements the heating oil
futures contract and provides yet another hedging instrument
for market participants to increase their flexibility in
managing their business risk.
Heating oil options can be used
independently or with heating oil futures to create hedging
strategies to fit any risk profile or cost consideration.
The holder of a heating oil option has
the right, but not the obligation, to buy or sell a heating
oil futures contract at a specified price at a specified
time, in exchange for a one time payment, or premium. The
seller of a heating oil option, on the other hand, has an
option to buy or sell a heating oil futures contract, if a
holder of an option chooses to exercise it.
There are two types of options: calls and
puts. A call gives the holder the right, but not the
obligation, to buy heating oil futures at a specific price
(the strike or exercise price) for a specific period of
time. A put gives the holder the right, but not the
obligation, to sell heating oil futures a specific price for
a specific period of time.
Buying a call or put is similar to
purchasing an insurance policy: in return for a one-time up
premium, the buyer obtains protection against the occurrence
of risk for the designated time period. To protect against
the risk of a heating oil futures price increase, a hedger
would purchase a call; to protect against a heating oil
futures price decrease, a put.
If prices do not move in an adverse
direction, the heating oil options buyer forfeits only his
premium and is otherwise able to participate fully in any
favorable heating oil futures price move.
A heating oil options seller (or writer)
performs a function similar to that of an insurance company.
He collects the premium and is obligated to perform, should
the buyer exercise the heating oil option. If the heating
oil options contract expires without being exercised, the
option seller profits by the amount of the premium.
Disposing of Options
Unlike heating oil futures, which must
either be liquidated or held to delivery, the holder of a
heating oil option has a third alternative: if the heating
oil futures price does not move enough to make exercising
the option worthwhile, or moves in the opposite direction,
the buyer can choose to allow his option to expire without
value.
NYMEX Division Heating Oil
Futures and Options
Contract Specifications
Trading
Unit
Heating Oil Futures: 42,000 U.S.
gallons (1,000 barrels).
Heating Oil Options: One NYMEX
Division heating oil futures contract.
Price
Quotation
Heating Oil Futures and Options: In
dollars and cents per gallon: for example, $0.7527 (75.27¢)
per gallon.
Trading
Hours
Heating Oil Futures and Options: Open
outcry trading is conducted from 10:05 A.M. until 2:30 P.M.
After hours heating oil futures trading
are conducted via the NYMEX ACCESS® internet-based trading
platform beginning at 3:15 P.M. on Mondays through Thursdays
and concluding at 9:30 A.M. the following day. On Sundays,
the session begins at 7:00 P.M. All times are New York time.
Trading
Months
Heating Oil Futures: Trading is
conducted in 18 consecutive months commencing with the next
calendar month (for example, on January 2, 2002, trading
occurs in all months from February 2002 through July 2003).
Heating Oil Options: 18 consecutive
months.
Minimum
Price Fluctuation
Heating Oil Futures and Options:
$0.0001 (0.01¢) per gallon ($4.20 per contract).
Maximum
Daily Price Fluctuation
Heating Oil Futures: $0.25 per gallon
($10,500 per contract) for all months.
Heating Oil Options: No price limits.
Last
Trading Day
Heating Oil Futures: Trading
terminates at the close of business on the last business day
of the month proceeding the delivery month.
Options: Trading ends three business days
before the underlying futures contract.
Exercise
of Options
By a clearing member to the Exchange
clearinghouse not later than 5:30 P.M., or 45 minutes after
the underlying heating oil futures settlement price is
posted, whichever is later, on any day up to and including
the option's expiration.
Options
Strike Prices
Twenty strike prices in
one-cent-per-gallon increments above and below the
at-the-money strike price, and the next ten strike prices in
five-cent increments above the highest and below the lowest
existing strike prices for a total of at 61 strike prices.
The at-the-money strike price is the nearest to the previous
day's close of the underlying heating oil futures contract.
Strike price boundaries are adjusted according to the
futures price movements.
Margin
Requirements
Margins are required for open futures
or short options positions. The margin requirement for an
options purchaser will never exceed the premium.
Trading
Symbols
Futures: HO
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