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Trading options in commodities

A call option allows you to buy an underlier at a fixed price on a future date and a put option allows you to sell an underlier at a fixed price in the future.

, ET Bureau|
Dec 10, 2019, 08.44 AM IST
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If the gold futures quotes at Rs 38,362.5, there is no profit no loss.
1. What is an option’s contract?

It gives a holder a right to buy or sell an underlier at a fixed price for delivery on a future date.


2. What are the types of options?

There are call and put options. A call option allows you to buy an underlier at a fixed price on a future date and a put option allows you to sell an underlier at a fixed price in the future.

3. What is the advantage of trading in options?

For an options buyer, the maximum loss is limited to the premium (price of option) paid to the seller while profits can be huge. However, for an options seller, the maximum profit is limited to the premium received from the buyer while losses can be potentially unlimited unless a stop loss is placed.

4. How are options in commodities traded?

These are European style options which can be exercised only at expiry unlike American style options which can be exercised during the life of the contract. The underlier is a futures contract and an inthe-money option can devolve into a futures contract. However, Sebi has allowed commodity exchanges to offer options on the spot commodity and not compulsorily on a futures contract. Some exchanges might opt for this.

5. How does an options on futures work?

Let’s take an MCX gold options January 29, 2020 expiry contract. The underlier is the near month gold futures contract ( 1 kg) expiring on February 5 which traded at Rs 37,674 per 10 gm (quoted price intraday Monday). The option strikes are at ?100 intervals.

Assume you buy a call option at 38000 strike, expecting the underlying futures to rise above ?38,000 per 10 gm before or by expiry. When you buy the contract you pay a premium of Rs 362.5 (intraday Monday) per 10 gm. To make money, the gold futures must be quoting above Rs 38,362.5 for the seller to make money.

If the gold futures quotes at Rs 38,362.5, there is no profit no loss. If it’s below that, the premium reduces concomitantly and there is a loss. If, however, the futures contract quotes at Rs 38,500, the profit is Rs 137.5 (500-362.5) per 10 gm or Rs 13,750 at contract level.

For the seller, if the gold futures contract at option’s expiry is less than Rs 38,000, she gets to keep the entire premium of Rs 362.5. If the futures is at Rs 38,200, she pockets Rs 162 and if it trades above Rs 38,362.5 losses begin for her.

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