Options On Futures: A World Of Potential Profit
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My first commodity trade was on pepper futures and this was sometime towards the end of or early MCX has done a tremendous job in promoting commodities market in India. They have continuously introduced new contracts and enhanced the market depth. Liquidity too has improved many fold since then. If How to trade options on commodities futures remember right, sometime aroundthere was an attempt to introduce options in the commodity market. Needless to say, when I first heard about this, I was quite excited thinking about all the possibilities that one would have trading commodity options.
But unfortunately, this never came through and the commodities options were never introduced in the market. Since then, this topic on commodities options has surfaced couple of times but each time, it just remained a market rumor. However, it now appears that options on commodities will finally hit the market sometime soon. You can read the new article here. Since then commodities exchanges have been working hard to build a good framework to introduce the commodities options.
Given this, I thought it would be good to have this quick note on what to expect and what to look for in the commodities options market. Just like futures, the options theory for commodities would remain the same. One of the important bits that you need to note with commodity options is that these are options on Futures and not really the spot market.
For example, if you look at a call option on Biocon, the underlying for this option is the spot price of Biocon. Likewise, if you look at Nifty options, the underlying is the spot Nifty 50 index value. However, if you were to look at an option on Crude Oil, the underlying here is not the spot price of Crude Oil. This is quite intuitive as we do not have a spot market for Crude Oil or for that matter any commodities in India.
However, we do have a vibrant futures market. Hence the commodity options are based on the commodity futures market. So in a sense, this can be considered a derivative on a derivative. For all practical purpose, this should not really matter to you while trading. The only technical difference between an regular option with spot as underlying and option on futures is the way in which the premium is calculate. The difference between these two models is the way in which the continuous compounded risk-free rate is treated.
I will not get into the details at this point. We still do not know how the exchanges will set up the framework for these options.
To how to trade options on commodities futures with, exchanges may roll out Gold options, and would slowly but for surely introduce options on other commodities. Here are the highlight. Lot size — Since these are options on futures, the lot size will be similar to the futures lot size. This is where it gets a little tricky. Settlement — For daily M2M settlement in Futures, the exchange considers the commodities daily settlement price DSP as the reference value.
The DSP of the commodity on the expiry day will therefore be the reference value for the options series as well.
Consider this example — Assume the DSP of a commodity is Assume this commodity has a strike interval at every 10 points. An explicit instruction will devolve the option into a futures contract. How to trade options on commodities futures futures contract will be at the strike. Now, here is an important thing that you need to remember — If you do not give an explicit instruction to devolve your CTM option, then the option will be deemed worthless.
You need to be aware that settlement in options market is by means of devolving the option into how to trade options on commodities futures equivalent futures position.
In the absence of which, the contract will be automatically settled by means of devolvement. There could be an instance where the ITM option that you have may not be worth exercising given the taxation and other applicable charges.
So in this case, you are better off not exercising your ITM option rather than exercising it. Now, we all know that a futures position requires margins to be parked with the broker. How do we account for this? I mean, when I go long on option, I just have to pay for the premium right?
I will cut through the technicalities and let you know what you should know and expect —. I guess as and when the option contracts roll out, we will have greater insight into the structure. I will updated this chapter when the commodity options roll out with the exact information. First week of October most likely. I have the following questions though: If no then that means we have to carry losses without having an option to how to trade options on commodities futures off. That will be disastrous situataion.
What will be likelihood of the options been rigged off in the beginning? I am scared may be some big players take us for a ride perticularly in the commencement months. Do we have to open commodity account with Zerodha to trade commodity options.
Then why is it european style options. They both can be squared off any time. What do they mean that european style options can only be exercized on expiry? How to trade options on commodities futures that mean that ITM options of buyers can not be squared off before expiry? I am familiar with the equity options of NSE for a long time. And How to trade options on commodities futures am very comfortable with them.
Now this beast comes up for which I am desparately waiting since announcement 2 years back. Almost daily I search for commodity option start date. But now it seems its nearby. Apart how to trade options on commodities futures the commodity options, there was a news about 6 months back about commencement of Cross currency futures and options.
But now it seems they are out of the basket of hope. Yup, its to do with devolvement I guess. Btw, this is just the draft. Rohit, this is commodity options, they are structured slightly differently from Nifty options. Sir do u ve any idea about wat ill be d premium on gold ill be an average.
It was announced that the Gold options would start somewhere between 6th and 12th October. Accordingly, the following amendments are made in the Business Rules of the Exchange by inserting Business Rules The above amendment in Chapter 1 of the Business Rules of the Exchange shall come into force with effect from the date of this circular. Members are requested to take note of the same and ensure compliance. Hi Sir I am confused about last trading day and settled price, please help Which is last trading day it is 5th or 2nd of every month If it is 2nd, settled price of which date would be considered?
Last trading date would be 3 days prior to the tender date. For settlement, the exchange would consider the daily settlement price DSP. Actually Sir I was asking, If I sell one call option then final settlement would be according to which date settlement price?
Looking at the handouts at mcxindia, Option contract will devolve into a futures position as if taken at the strike price of the Option contract. One Call option of strike bought at Rs will devolve into a future position as if bought at Why is it not updated as the trading in Gold options is starting in 30 minutes 10am.
I was hoping that it will get updated in the securities master of Pi well in advance. We will go live next week, Amarjeet. When I clicked on your above link I got a message that my commodity account is not enabled. I used to trade in commodity some months back.
And what is the procedure to enable it? Are you sure you were trading within us? Will get this checked. I realized it later and then I logged in with my account and so…. I could give consent easily then…. U can find the premium values at this mcxindia website link. What is the premium of gold futures to spot market? What is the premium how to trade options on commodities futures Gold November Call? For now you can track the premiums here — https: Margins are dependent on the strike that you choose, but generally, it is about the same as the margin required for a futures trade.
Check this — https: We have not started Gold options yet. Will start sometime soon. Meanwhile, please do give your consent to for MCX options — https: Why zerodha kite or pi not getting MCX gold option contract for trading?