NYMEX Heating Oil (ULSD) Futures and Options Trading

Learn the most effective strategies for buying and selling options on futures contracts. Also learn producer and consumer hedging strategies.

*The information contained within this webpage comes from sources believed to be reliable. No guarantees are being made to the content's accuracy or completeness.

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.

Are you a heating oil hedger? If so, click here to learn more.

Heating Oil Options on Futures Contracts Explained

A heating oil call option gives the purchaser the right but not the obligation to purchase the underlying futures contract for a specific time period and a specific price (strike price). Let's say that you wanted to purchase a May heating oil $1.50 call option and pay a premium of $1,200.

This means that you bought the right but not the obligation to buy 42,000 gallons of May heating oil for $1.50 per gallon. Of course, very few options are bought for the purpose of taking delivery but that is one potential outcome. Chances are that you either bought the heating oil option to hedge your price risk in the physical coffee market (you may be a heating oil producer or heating oil end user) or maybe you are speculating that heating oil prices will go higher in an attempt to make a profit.

A heating oil put option gives the purchaser the right but not the obligation to sell the underlying heating oil futures contract for a specific time period and a specific price. Let's say that you wanted to buy a May heating oil $1.30 put option and pay a premium of $1,300.

This means that you have the right but not the obligation to sell 42,000 gallons of May heating oil at $1.30 per gallon.

What is the delta factor?

The delta factor of an option represents the estimated percentage of change an option will receive based on the movements in the underlying futures contract.

Let's assume the May heating oil call option above has a 30% delta factor. This means that if the underlying futures contract were to rally by $1,000, then the call option would accrue by approximately $300 or 30% of $1,000 in the May heating oil futures contract.

What is theta?

Options are wasting assets which means that they lose value as time passes. The theta of an option is the measure of time decay.

Let's assume that you bought a May heating oil $1.50 call option with 60 days left until expiration. Let's also assume that the heating oil futures prices have moved very little over the last month and are exactly the same price 30 days later. Your option will have lost 30 days worth of time and therefore will be worth less today that it was when it had 60 days left until expiration.

What is vega?

Vega is a measure of the implied volatility of an option contract as it relates to its underlying futures contract. For instance, if the underlying future contract is extremely volatile then the implied volatility of the options of that futures contract will be affected.

In a high implied volatility environment option premiums tend to expand. Conversely, in a low implied volatility environment the option premiums tend to decrease.

Here is the energy products brochure courtesy of the CME Group.

Energy Brochure

*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

Contract Specifications

Trading Unit
Futures: 42,000 U.S. gallons (1,000 barrels).
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 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.

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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To learn more about the energy futures visit unleaded gas futures, crude oil futures and natural gas futures.