I used to always hear this advertisement on the radio, usually during the Rush Limbaugh show about how you could invest in fuel options. The minimum investment ws $5,000, and the ad said that if gasoline went up even 1 cent a gallon an investment of 5K could return 20K. Everyone I know invests in something, usually more than 5 grand, but I know of nobody who invested in this.
Soooooooooooo…when gasoline prices shot up did people who did invest in this get rich? What’s the dope on this?
Oil is a comodity, just like coal or frozen concentrated orange juice. Like all comodities, it is traded on the comodities exchange. You can buy and sell options whicha basically is a promise to buy a certain amount at a fixed price at a set future date. The idea is that if the price goes up, you get the diference. If it goes down, you hold on to the comodities. Similar to stock options.
The problem is that options are not stocks which represent shares in a company. Comodity options are for ACTUAL amounts of what you bought. ie if you can’t sell the option before it expires, you are literally stuck with a truckload of oranges, gold, soybeans, oil or whatever the option was for. That is why most regular people don’t getinvolved in the comodities market.
And its actually spelled commodity, not comodity.
Yeah, I know all this. I’m just wondering if alot of people made a killing when oil prices went up. Someone had to be making money.
Yeah. When prices of items go up, someone always makes a killing.
These are called ‘vulture’ or ‘vampire’ buyers in certain circles. These are people who invest in the problems and troubles of others and capitalize on them. Like, when vegetable crops are damaged due to weather, people rush to buy stock in these companies, pushing the prices up, which in turn pushes the retail prices up even higher because the wholesale prices jumped beyond what they would have been without investors.
Think about those ‘buy now’ programs for repossessed homes. You buy a home that a bank has taken over, cheaply, invest about $2000 into it fixing it up, keep it a year, sell it and make a big profit! This encourages banks to throw people out on the street more quickly than before in order to make back most of their money in a short time instead of letting the owners limp along, paying when they can, for years.
The same with oil prices. Invest when the prices are low, drive up the stock prices, which in turn drives up the pump price and make a killing, while hurting everyone else who has to pay the increased gas costs.
A TV spot used to inform everyone about problems in the food industries and urge them to invest in distressed stocks while the prices were bottoming out, because the good were going to sell high in the retail outlets and they would make a killing. That’s why those ears of corn you bought at 10 for $100 last year, now, having been hit by drought, are selling at 2 for a buck this year. (Curiously enough, all of those products depending on corn meal, like cereals, never up their prices a penny during such a shortage.)
Vulture markets: preying on the hardships of the many to enrich the few.
More to your question:
Options are derivatives. This is a very risky area for the average person to be gambling the house money.
Did someone make money off of 'em? You bet. The handful of folks who deal in these things every day (and SOLD at the right time, locking in their profit) probably made a bundle. I don’t begrudge those folks their occasional fat gains since they regularly lose bundles, too.
That is a Futures contract, not an option. With a Future you enter into a contract which obligates you to buy/sell a commodity on a given date at a set price.
To convert a Futures contract into money (positive or negative) you get another Futures contract for the same commodity, but in the other direction. You then pocket or pay the difference. Most Futures trading is by speculators who work this way and will never so much as see a bushel of corn, let alone take delivery of some. Futures are very risky investments.
Options contracts give the holder the right but not the obligation to buy or sell something at a given price. In commodities markets the thing you have the right to buy sell is usually a Futures contract. If the value of the underlying Future goes up then you can make a bundle (the 20K from the OP), if it drops then you don’t bother to exercise your option. The Option itself has a purchase price (the 5K from the OP) which is the most the holder of an Option can lose on the deal. Buying Options therefore has a fixed level of loss (5K)and an unlimited possible benefit(20K). For the seller of an Option there is a maximum possible return (5k) but potentialy unlimited losses (20K).
Why would buying stock in a company affect its retail prices? The price of a stock in a company is roughly related to its total assets, current earnings, and projected future earnings, less its liabilities. It’s actually a lot more complex than that, but my point is that it’s not the other way around.
Do you have a cite for this, or you just speculating? Don’t believe everything you see on TV, especially on an infomercial.