Fundamentals of Trading Energy Futures and Options

261 Pages·2002·7.01 MB·English

by  Steven Errera

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F
UNDAMENTALS OF
Trading Energy
&
Futures Options
2 E
ND DITION
S E
BY TEVEN RRERA
S L. B
AND TEWART ROWN
Disclaimer: The recommendations, advice, descriptions, and the
methods in this book are presented solely for educational purposes.
The author and publisher assume no liability whatsoever for any loss
or damage that results from the use of any of the material in this
book. Use of the material in this book is solely at the risk of the user.
Copyright © 2002
PennWell Corporation
1421 S. Sheridan
Tulsa, Oklahoma 74112-6600 USA
800-752-9764
[phone]
[email protected]
www.pennwell.com
www.pennwellbooks.com
Marketing Manager: Julie Simmons
National Account Executive: Barbara McGee
Director: Mary McGee
Production/Operations Manager: Traci Huntsman
Cover and Book Designer: Brigitte Coffman
Library of Congress Cataloging-in-Publication Data pending.
Errera, Steven
Fundamentals of trading energy futures and options / Errera, Steven
Brown, Stewart L.—2nd editon.
p. cm.
q.cm
Includes index
ISBN 978-0-87814-836-3
All rights reserved. No part of this book may be reproduced, stored in a
retrieval system, or transcribed in any form or by any means, electronic
or mechanical, including photocopying and recording, without the prior
written permission of the publisher.
Printed in the United States of America.
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H List of Figures ....................................................................vii
List of Tables.....................................................................ix
Acknowledgments.....................................................................xi
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Introduction ...................................................................xiii

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Chapter 1 Futures and Options Contracts
and Markets..................................................1

. Chapter 2 Market Mechanics.......................................11

Chapter 3 Behavior of Commodity Futures Prices.......31
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Chapter 4 Speculation and Spread Trading..................53
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Chapter 5 Hedging.......................................................75

. Chapter 6 Introduction to Options on Futures............95

Chapter 7 Energy Options Strategies..........................111
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Chapter 8 Technical Factors.......................................131
Chapter 9 History and Growth..................................143
3 Chapter 10 Economic Implications of Energy
Futures and Options.................................169

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Appendix A New York Mercantile Exchange
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No. 2 Heating Oil Futures and
Options Contract Specifications................178
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Appendix B New York Mercantile Exchange
New York Harbor Unleaded Gasoline

N Futures and Options Contract
Specifications.............................................182

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Fundamentals of
Trading Energy Futures & Options
Appendix C New York Mercantile Exchange Light, Sweet Crude
Oil Futures and Options Contract Specifications...............186
Appendix D New York Mercantile Exchange Henry Hub Natural
Gas Futures and Options Contract Specifications..............189
Appendix E New York Mercantile Exchange Propane Futures
Contract Specifications......................................................192
Appendix F New York Mercantile Exchange Four Electricity
(Palo Verde, California–Oregon Border, Cinergy, Entergy)
Futures and Options Contract Specifications.....................194
Appendix G International Petroleum Exchange Gas Oil
Futures and Options Contract Specifications.....................197
Appendix H International Petroleum Exchange Brent Crude
Oil Futures and Options Contract Specifications...............200
Appendix I International Petroleum Exchange Natural Gas
NBP Futures Contract Specifications.................................203
Appendix J New York Mercantile Exchange Central Appalachian
Coal Futures Contract Specifications.................................205
Appendix K New York Mercantile Exchange Crack Spread
Options Contract Specifications........................................208
Glossary of Commodity Futures and Energy Industry Terms........................211
Index ..........................................................................................233
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0 Figures

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2–1 Initiating Trades and Order Flow for
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Futures and Options Contracts.................................20
2–2 Trading Controls.......................................................23

L 3–1 Cash Prices vs. December Futures.............................34
3–2 Contango Market, Unleaded Regular
C Gasoline Futures.......................................................35
3–3 Heating Oil Futures...................................................37

3–4 Inverted Market, Heating Oil Futures........................38
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3–5 Unleaded Regular Gasoline Futures...........................39
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3–6 New York—London Price Convergence....................42

. 3–7 Convergence of Cash and Futures.............................47

3–8 Convergence of Cash and Futures—Location Basis...49
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3–9 Convergence of Cash and Futures
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with Futures Held Constant......................................51
4–1 Price Differences Between December and

3 July New York Mercantile Exchange
No. 2 Heating Oil Futures Contract as of June 1.......63

4–2 Intermarket Spread, Natural Gas Futures Prices,
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New York Mercantile Exchange
7
Minus Kansas City Board of Trade.............................68
4–3 Breaking Down the Barrel
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(Approximate Petroleum Product Yields)...................70
4–4 How the “Paper Refinery” Works...............................71

6–1 Call Buyer...............................................................102
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6–2 Call Writer...............................................................104

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Fundamentals of
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6–3 Put Buyer........................................................................................105
6–4 Put Writer.......................................................................................105
6–5 Call Value with Intrinsic Value Line................................................107
7–1 Long Calls.......................................................................................113
7–2 Bull Spread.....................................................................................114
7–3 Bear Spread.....................................................................................116
7–4 Butterfly Spread..............................................................................116
7–5 Long Straddle..................................................................................117
7–6 Short Straddle.................................................................................118
7–7 Long Strangle..................................................................................119
7–8 Short Strangle.................................................................................119
7–9 Short Cash Crude...........................................................................122
7–10 Crude Oil Cap at $16 per Barrel.....................................................122
7–11 Short Crude Oil Floor at $14 per Barrel.........................................125
7–12 Zero Cost Collar..............................................................................126
7–13 Bull Spread—Crude Oil..................................................................127
8–1 An Example of a Daily Bar Chart....................................................134
8–2 Trend Lines.....................................................................................135
8–3 Channel Trend with Breakout.........................................................136
8–4 Slope/Price Velocity.........................................................................136
8–5 Head and Shoulders........................................................................137
8–6 Gap Breakout..................................................................................138
8–7 Triangles..........................................................................................139
8–8 Pennant...........................................................................................140
8–9 Descending Triangles......................................................................141
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0 Tables

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1–1 Energy Futures Contracts Trading
More Than 100,000 Contracts/Year............................2

L 1–2 Energy Options Contracts Trading
More Than 50,000 Options/Year.................................3

C 2–1 Margin Requirements for New York
Mercantile Exchange Energy Futures Contracts........13
2–2 Price Quotes for Energy Futures Contracts...............27
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6–1 Crude Oil Premiums for Three-Month Options........98
. 7–1 Heating Oil Premiums for Three-Month Options....111

. 7–2 Crude Oil Premiums for Two-Month Options
(Futures at $15 per barrel)......................................121
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9–1 Past and Present Energy Futures Contracts.....150–156
0 9–2 Growth of New York Mercantile Exchange
No. 2 Heating Oil Futures and

Options Contracts...................................................157
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9–3 Growth of New York Mercantile Exchange
Unleaded Gasoline Futures and
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Options Contracts...................................................158

7 9–4 Growth of New York Mercantile Exchange
Crude Oil Futures and Options Contracts

5 (Cushing, Oklahoma).............................................159
9–5 Growth of New York Mercantile Exchange
Natural Gas Futures and Options Contracts...........160
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9–6 Growth of International Petroleum Exchange
Gas Oil Futures and Options Contracts..........................................161
9–7 Growth of International Petroleum Exchange
Crude Oil Futures and Options Contracts......................................162
9–8 New York Mercantile Exchange —
Deliveries on the No. 2 Heating Oil Futures Contract.....................163
9–9 New York Mercantile Exchange
Electricity Futures Deliveries ..................................................164–165
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0 Acknowledgments

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C Every book requires special expertise from a variety of
sources. For this second edition, I again want to thank the staff
members of the New York Mercantile Exchange (NYMEX), the
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International Petroleum Exchange (IPE), the Kansas City Board of
. Trade, the Chicago Board of Trade, the Minneapolis Grain

. Exchange, and the Futures Industry Association who provided
needed information, with a special thank you to the NYMEX sta-
.
tistical department, Dan Brusstar and Dan McElduff from
0 NYMEX research, and the staff of the IPE. I’d also like to thank
Walt Usatschew, Brad McKenzie, and Mitch Barber from the

petroleum industry.
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Last but not least, thank you again, my wonderful wife, Edie
Korotkin, for your valuable assistance in the preparation of this
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new edition, and on whose support I always rely.

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Steven Errera
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