Harvesting Profits From Black Gold

In our other post we stated that oil should head upwards in nearly all time frames, especially in the medium term and longer. Due to our bullish outlook, and blossoming prospects for better and sooner than expected worldwide growth, it is time for you to reconsider your energy investment allocation.

Volatility is another aspect of oil that will sure come into play, and there are no reasons that volatility in oil should subdue any time soon. Volatility in oil is surely likely to increase with the price due to OPEC meeting uncertainty, higher trading volume, profit taking, shifts in federal reserve policy, and for other reasons.

So how can one take advantage of the many oil market dynamics?

1. Buy An Oil Index Fund -An oil index fund attempts to mirror or replicate the returns of the overall oil market, so if oil prices rise by 20% an oil index fund should be very close to a 20% gain for the same period.
Oil index funds attempt to provide a better risk-return payoff than mutual funds, so in turn they are more risky (volatile) than mutual funds, but less risky than individual oil stocks. A good choice for the moderately conservative to moderately aggressive investor.

2. Buy An Oil/Energy Mutual Fund- In general a minimal risk oil investment can be made through mutual funds which invest in oil and energy on an international scope. Mutual funds provide a nice, simple opportunity for you to take advantage of rising oil prices on a diversified basis, in general they are more suitable for conservative to moderate investors.

3. Buy Oil Stocks- The most widely used strategy of investing in oil, but however it may be the most widely misused, as there are numerous factors to be considered when investing in oil stocks. When choosing stocks in an individual sector such as oil, the "stay diversified" strategy does not provide good returns since there is a large, positive correlation, between all of the stocks in the sector.

4.  Oil Hedge - A more complex strategy, which when done right, greatly decreases you risk for a loss and should give you one of the best risk-return ratios. Hedging strategies involve the use of different financial instruments at concurrent times, usually derivatives (swaps, options, futures, and others). Some hedging strategies attempt to take a position in such a way that when the value of one derivative declines, the value of the other increases. Other hedging strategies can be used as a volatility play, as they profit when there is significant movement in a security regardless of the direction.

All of these strategies are meant for you to be able to profit from rising oil prices, and all deserve special attention and research in their own rights. When choosing one of these strategies to invest in oil it is important for you to know your investor profile like you know if the sun is out or not. You should consider re-evaluating your investor profile and tolerance for risk as that will give you a nice idea for which of these strategies to use.

In our next post's we will elaborate on each of these strategies. We will start by giving you an idea of how to choose some oil index and mutual funds; then we will give you some insight on specific names of what we believe are appealing funds. Oil sector stock picking and hedging strategies will also be discussed in further post's. In the end we hope to help you have a better understanding of how to put the oil market in your favor.