westgj

Fast forward forward to today and Dec 12 futures contract is $96. Buying one futures contract (1000 barrels of oil) back in Oct 06 would mean you would be up $34,000 less brokerage. Not too bad at all and who knows what the upside could be between now and Dec 12. I would be very suprised to see it fall back to $62. Since I'm a believer in peak oil (or at least a production plateau) I'm looking for a long-term play on oil. I have previously bought oil producers but I'm now looking for a long-term direct exposure to the price of oil. If I believe that oil is going to rise substantially over the next few years then it seems to me that buying long-dated call options is a good strategy. I would buy call options and not futures directly to avoid short-term volatility in the futures price hitting my stop-losses and kicking me out of this long-term trade. I also know what my maximum downside is. From looking at the NYMEX data it looks like the longest dated options is Dec 2010 (although as someone pointed out there maybe other ways of going further out). Let's say I buy an out-of-the-money Dec 2010 call option at a strike price of $120 and the call option price is $7.07 ($7,070). Let's say for arguments sake that oil reaches $150 (this is not being overly optimisitic in my opinion) between now and Dec 2010 so if I bouught a single Dec 2010 call option now I would be up $22,930 less brokerage. If the worst-case scenario happened and oil slumped then I've lost $7,070. If oil were to go really ballistic in the next few years as some analysts say is a distinct possibility then it seems to me that this could be a fantastic trade. To do this trade I really want oil to come back to say $85 and therefore the Dec 2010 call option premium to drop in price significantly but who knows if that's going to happen. For the people who believe in yet higher oil prices in the next few years I don't hear many talking about a futures call option strategy, everyone seems to be talking about buying company stocks of producers or explorers. I'm in Australia so I don't think I have access to a local oil ETF and probably wouldn't be interested in it either. Playing with futures call options rather than stocks means I don't have to worry about stock market sentiment so much or company specific problems. So, what do others think of this idea? I know that trading with long-dated futures is not how most people play futures but it seems like a good idea to me or am I missing something? Remember, I'm betting on higher oil prices in the next few years not the next few months. Greg