| October 17
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
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.
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
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.
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
How will these options work?
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
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.
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
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.