NYMEX Heating Oil (ULSD) Futures and Options Trading
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The History of Heating Oil and Heating Oil Futures Market
The market for heating oil, also known as No. 2 fuel oil, today known as ultra
low-sulfur-diesel (ULSD), grew rapidly after
World War II, as homeowners and builders switched from coal. Heating oil is very
similar in chemical makeup to diesel fuel. Over the last 20 years, the sulfur
content of heating oil has been reduced and today's heating oil is 95% cleaner
than it was in 1970.
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. The price to
consumers of home heating oil is usually comprised of approximately 42% crude
oil, 12% from refining costs, and 46% for marketing and distribution costs. 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.
Heating oil has the energy output of 138,690 BTUs per gallon.
Natural gas has 99,000 BTUs per therm. It takes 1.4 therms to equal
the heat output of one gallon of heating oil.
Here is the energy products brochure courtesy of the CME
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. Lean More >>>
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
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
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
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
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.
options can be used independently or with heating oil futures to
create hedging strategies to fit any risk profile or
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.
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
*Contract information changes from time to time. Please
click here to see the most recent
contract specifications and
click here for the most recent trading hours.
NYMEX Division Heating Oil Futures and Options
Futures: 42,000 U.S. gallons (1,000 barrels).
Options: One NYMEX Division heating oil futures
Futures and Options: In dollars and cents per
gallon: for example, $0.7527 (75.27¢) per gallon.
Futures and Options: Open outcry trading is
conducted from 9:00 A.M. until 2:30 P.M.
After hours heating oil futures trading are conducted via the GOLBEX 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.
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).
Options: 18 consecutive months.
Minimum Price Fluctuation
Futures and Options: $0.0001 (0.01¢) per gallon
($4.20 per contract).
Maximum Daily Price Fluctuation
Futures: $0.25 per gallon ($10,500 per contract) for
Options: No price limits.
Last Trading Day
Futures: Trading terminates at the close of business
on the last business day of the month proceeding the
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.
Margins are required for open futures or short
options positions. The margin requirement for an
options purchaser will never exceed the premium.
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unleaded gas futures,
crude oil futures and
natural gas futures.