Oil has been one of the more volatile assets in the past few months and at this point almost looks like a play on the global economy. As perspectives of the world economy became bleak, oil began going down and has lost more than half of its value.
So there are 4 ways that I will present to invest in oil.
1-Futures: The more obvious one, investing in futures or future options on the Nymex exchange (or a few others): this is certainly an efficient way to do this as you are playing directly into oil. However, this type of investment is very risky and requires margin posting and so on. Brokers often require to have lots of cash to trade futures because you can lose a lot of money very quickly. The main difference in the next 3 alternatives is that you cannot lose more than what you invested in (assuming you went long).
2-ETF: You can invest in various ETF’s such as OIH (oil services) that are very highly correlated with oil. There are even ETF’s that track double the exposure (long or short) of oil. These have fairly low fees and are an interesting way to invest in oil. If you want to have leverage, you can invest in DXO (that tracks 2 times the return of oil minus fees, etc). SZO is similar but tracks 2 times the return of a short position so if you own this stock, you will want oil to go down.
3-Airline stocks: Want to have an indirect play on oil? Airlines typically are very highly correlated with oil, especially some like CAL (Continental Airlines) that do not typically hedge their jet fuel costs. The airlines are an inverse play of course. As oil goes up, airlines pay more for their fuel and lose more money.
4-Solar energy: Stocks such as First Solar (FSLR) are highly correlated with oil. Not too difficult to see why. As oil becomes more expensive, alternative energy sources are more in demand. the chart at the top of this bost is one that shows the very high correlation between OIH and FSLR…
So basically, if you think the world economy will bounce back and that oil will go up you could either go:
-Long oil futures
-Long OIH or DXO
-Short an airline stock
-Long solar energy