A friend of mine emailed me today inquiring about oil. “it’s at it’s lows”, he said, “looks like it bottomed out; gotta rally from here”. Well, I don’t know if he’s right or wrong, but (for our purposes) that’s not important right now. What IS important (and interesting regardless) is how one capitalizes on such an outlook.

There are a few ways, all different in their own right. First–and for a lot of securities options traders, the one that comes to mid initially–is to buy calls on or shares of an oil-services fund-of-sorts like OIH, the oil-services HOLDR. (BTW, a HOLDR is similar to an ETF with small [for most people, insignificant] differences).

While putting a bullish position on an oil-services HOLDR seems like an obvious play for a bullish-on-oil trader, it may not be a perfect trade to match the bullish oil-play objective. Why? First, buying an oil-services HOLDR–by definition–is a position in the stocks of companies in the oil services industry. Among the highest weighted stocks in OIH are Transocean, LTD (RIG), Schlumberger Limited (SLB), Haliburton (HAL), and Baker Hughes (BHI). While these companies have a strong interest in the price of oil (crude), they are companies with costs and revenues and strategies that can effect profits independent of the price of oil. For a more pure, speculative play on oil, just buy the future.

A crude oil future is about the next best thing to filling your garage with barrels of the black stuff. A long futures contract is technically a contract to buy the “spot” (in this case crude oil) at a specifies point in the future. (Don’t let this intimidate you. Simply selling the contract to close it eliminates the obligation to buy. This way, you don’t end up with a garage full of barrels of crude!) If a trader is truly bullish on the price of oil, buying a futures contract is the most practical way to do it. Of course, practicality doesn’t come without problems.

Securities and commodities are governed differently. Securities (and securities options) are overseen by the SEC–Securities and Exchange Commission. Commodities (and their options) are overseen by the CFTC–Commodity Futures Trading Commission. So, your broker may not be able to offer you both. In order make a commodities trade you either need a broker who can do both, or in addition to your online securities broker open an account with an FCM–Futures Commission Merchant. For those with online securities accounts, first look into your firm’s offerings. Do they allow futures? If not, do some research. Talk to your investing friends. See if they can recommend an FCM. You can even do commodity options through them.