Oil options trading refers to the right, but not the responsibility, to buy or sell a thousand barrels of crude oil at a certain agreed price, called the strike price within the option expiry date (which is different from the contract expiry date). This makes oil options trading as a derivative contract since no actual exchange of goods is actually involved in this trade but it is however based from a real underlying asset.
Oil options trading is a great way to be involved in oil trading especially if you do not have the huge amount of funds required to participate in trading oil futures contracts. With oil options trading you can trade with a smaller trading account while knowing the value of the risk before the trade.
Basically there are two kinds of options: the call option which gives the buyer the right but not the responsibility to buy the underlying asset at the strike price, and the put option which gives the buyer the right but not the responsibility to sell the underlying asset at the strike price. The person who is the option buyer needs to pay a premium to the option seller in order to obtain this right. Once the buyer exercises this right to buy or sell the underlying asset, the seller of the oil options is compelled to do so at the established price. In addition, the buyer of the options contract may choose not to do anything and let it expire within the option expiry date.
Oil options trading uses the concept of directional trading in order to gain profits off these transactions. What the potential buyer of the option does is that he/she watches the movement of the prices in the market to look for an indicator on when to purchase a call or a put. If that person believes that the price of oil is increasing then he/she will buy a call option so that he/she can sell it to the market again once the price drops; on the other hand if that person thinks that the trend of oil prices is going down then he/she will buy a put option.