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Option to trade in Gold Options this Diwali
Posted by Inditrade on Oct 16, 2017


Option to trade in Gold Options this Diwali


This Dhanteras, Indian investors will have one more option – trading in  commodity options. On this day, which is auspicious for the purchase of gold, the Multi Commodity Exchange (MCX) will launch gold options on 1 kg gold  contracts.

 

Side by side, SEBI has approved the launch of options trading on the National Commodity & Derivatives Exchange (NCDEX) too. This exchange has chosen to make its foray into options with guar seed  as the underlying, as this commodity is among the most traded commodities on the NCDEX.

 A little over two years ago, in September 2015, SEBI’s portfolio of responsibilities expanded as it became the regulator for the commodity markets too, post its merger with the erstwhile Forward Market Commission (FMC). With much consideration, and amongst many other progressive changes it made in the commodities market space, it has issued suitable pricing and settlement guidelines for options trading on commodity exchanges. This much awaited move has come around a decade after commodities futures were initiated.

 Testing the waters

According to these guidelines, each commodity exchange would be allowed to start options trading in only one commodity, initially. SEBI further stated that the options should be launched only on  contracts of commodities that were among the top five, in terms of the exchange’s turnover value for the previous year. Another condition was that the exchange should choose a commodity for which the average daily turnover of the underlying futures contracts on the exchange was at least Rs 200 crore for agricultural and agri-processed commodities and Rs 1,000 crore for non-farm commodities, during the past one year.

 Lastly, SEBI has deliberately avoided introducing index-based futures,for now, despite the fact that all leading commodity exchanges have their indices in place. However, market participants do not really see this as a drawback as they are currently more interested in hedging against the price movements of specific commodities and not the overall market.

How will these options work?

As in the case of equities, both types of options– Calls and Puts–will be available. However, unlike equities, which are settled in cash, here the underlying will be commodities futures contracts. Accordingly, as settlement in physical deliveries is allowed in the case of future contract in commodities, options on commodity futures will also enjoy that alternative. Effectively, on maturity, as the options devolve into futures contracts, all the norms that apply to futures – including the choice to take physical delivery  will apply.


Benefits all around

As the list of commodities futures that support options trading expands, so will the benefits to a wide range of commodities market participants. From farmers and end-users to importers and small and medium entrepreneurs, everyone will be able to manage their commodity risk more efficiently.

Especially for farmers, options trading could become a game changer as it would enable them sell their produce through the derivatives market and enjoy price protection in case the price falls below their a benchmark level. On the other hand, they could also stand to benefit from any rise in price as well.

 Bright and Prosperous Future

At present, the monthly volume of commodity derivatives is only around 2 per cent of the value of equity derivatives traded on the NSE. With the introduction of options on a greater number of commodities, trading in commodity derivatives could pick up in the future.Overall, options trading is expected to make the Indian commodity derivatives markets more vibrant and efficient due to the  greater liquidity and hedging opportunities that it will unveil.

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