Essential Information About Options Trading in Commodities
Options trading is also widespread universally. Major exchanges such as NYMEX, CME, LME & ICE provide the actual options on the commodities ranging from gold to oil to industrial metals. After the thirteen years-long gestations, the Indian commodity markets launched options in Gold, opening new avenues for hedging & trading. But is very much essential for speculators or readers & investors to understand the specific options trading in the commodity markets as an expiry method is different from that of Forex & equities.
Essentially, there are 2 types of commodity options, the call option & the put option, similar to what we have in the Forex & equities. There are 2 specific sides to each option trade, the purchaser & the seller. Every side experience the opposite result. If the option purchaser is also making money, an option seller is losing money in an identical increment & vice versa.
Talking about the gold options- the refiner or jeweler can also sell out f money options against their inventory if they are willing to accept the considerable amounts of specific risk with the main prospects of the limited risk & the unlimited profit potential, but also faces the inherent risk with any speculation.
When to utilize commodity options?
The decision about purchasing /selling any option generally depends on your view of the market & your desired objective. The trader can also look at options differently from the commodity producer looking to hedge his cost risk. The hedger also would be interested only to protect his original margins by mitigating price risk when the speculator is also interested in profiting out of the market moves.
Benefit of options
There is no specific mark to the marker margin that calls for the option purchasers. They pay the premium upfront to the particular option seller.
Cost is also lesser than taking the futures contract. Returns are relatively higher & maximum loss is also limited to premium / the option’s price, unlike in futures where returns are high & losses can be unlimited.
Options are very much flexible & the option holder also can participate fully in any price movement.
Generally, options represent the form of price insurance, the actual cost of which is an option premium determined.
What is different in the commodity options?
Unlike equities, commodity options are on futures and not on the spot. If you are trading Nifty options, your underlying is Nifty SPOT and not Nifty Future, the same for any equity stock option. Still, Gold options are on MCX Gold futures and not gold spot prices in commodities. The underlying for MCX Gold Futures is the gold price. So, we are trading a derivative of a derivative.
Settlement & strikes
There will also be a total of thirty-one strikes available for trading for each contract launched. Considering one ‘At the money strike’, there would be fifteen strikes above & fifteen strikes below ATM. Expiry of an options contract will also happen three business days before the 1st business day of the tender period of an underlying futures contract, with the settlement of premium on a T + one-day basis.
The exchange also shall levy pre tender margin on a long purchase position entering the specific option delicate period, which begins two days before the option expiry day, & the specific settlement will also occur on the regular settlement price of an underlying futures contract on an expiry day of the options contract.
Is physical delivery optional?
Yes, physical delivery is also optional. But the option holder has the selection to square off a place & book the gains or losses if any. To know this in detail, you have to know what are futures and options.
To sum this up, the launch of options in the Indian commodity markets also will enhance participation & increase the liquidity in the markets. The producers, processors & traders, & the processors, importers/ exporters get the online stage for price risk management. This delivers the set for producers to hedge their positions according to their actual view of the specific prices.