How To Trade Commodity Options - All About Forex

How To Trade Commodity Options

How To Trade Commodity Options – In a historic decision for the Indian commodity derivatives market, the market regulator SEBI (Securities Board of India) approved trading in commodity options (futures) in 2017 after much demand from trading members. In October 2017, options trading on gold (1 kg lots) was allowed, making it the first commodity option traded on Indian exchanges. But what is a commodity option or commodity option?

Options are rights (not an obligation) to buy or sell an underlying security at a predetermined price, known as the exercise price, on a certain day, the day the contract expires. There are two types of options – American-style and European-style options – based on when the right to sell or buy can be exercised. While in American options one can exercise his/her right to buy or sell before the expiration date, in European options one can exercise the right only on the specific date which is the date on which the option contract expires. In India, only European-style options are traded and option contracts expire on the last Thursday of the month.

How To Trade Commodity Options

How To Trade Commodity Options

In options trading, the risk for the buyer of the option is limited and the profit potential is unlimited. This is because the buyer of an option can choose to exercise his right to buy an underlying asset at the strike price on the day the contract expires, if the strike price is lower than the current market price, limiting his risk of loss. . Of money. If the buyer exercises his right to buy at the exercise price, the seller must carry out the transaction under agreed terms.

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For a seller or signatory of an option contract, the profit comes from the premium charged for writing the option, which he will charge regardless of whether the buyer exercises his right to buy or not. The sellers or underwriters assume that most option contracts expire worthless without being exercised by buyers.

Commodity trading options contracts are rights to buy (call option) or sell (put option) commodity futures contracts at predetermined prices on the contract’s expiration date. It is important to note that unlike stock options where options include rights to sell or buy the company’s shares at predetermined prices, it works a little differently for commodity trading.

In India, market regulators generally allow options trading only in the commodity futures market and not in the commodity spot market because in India, the commodity spot or cash market is regulated by state governments, while SEBI only regulates the commodity derivatives market.

A call option gives the owner the right to buy the underlying commodity futures at a fixed price or the strike price on the contract’s expiration date. The buyer of an option is said to hold a long option. If the buyer chooses to exercise his right to buy, the options contract becomes the futures contract at the expiration date.

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The buyer of a purchase option will exercise his right only if there is substantial value; That is, the exercise price is lower than the prevailing price of the commodity futures contract.

Let’s say trader G is bearish on one-month gold futures prices currently trading at Rs.1500 per lot, expecting prices of the underlying asset to fall. He entered into a one month Gold Call option at an agreed strike price of Rs.1150. He pays the insurer a premium of NLG 50 for the option contract.

Now, on the expiration date of the contract, Trader G finds that his bets have risen nicely. Since G wants to buy low, if the current price of the one-month gold futures trades somewhere higher than 1150 rupees, say 1350 rupees per lot, trader G will continue to exercise his call rights and convert the options into a one-month futures contract at the strike price while A handsome profit of Rs.200. The buyer of the option will be In The Money (ITM) when the exercise price is lower than the current market prices. In this case, the signatory of the option is obliged to fulfill the contract.

How To Trade Commodity Options

In another market scenario, if the market price of one-month gold futures is even lower than the strike price of Rs.1150, say Rs. 1000, the buyer of the option can choose not to exercise his right to buy at the exercise price. The contract will expire worthless without being exercised. The only loss to Merchant G will be the premium he paid to the insurer.

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A commodity put option gives the owner the right to sell futures contracts on the underlying commodity at a predetermined price once the contract expires on a fixed date, which is the last Thursday of the month.

One can also sell or sign a put option on commodity futures contracts, which may expose him/her to price risk because if the buyer chooses to exercise his right to buy the underlying contract, the underwriter will have to honor his side of the deal. But the underwriters’ reward lies in the premium they receive for such trades in put options, as the belief is that most option contracts will become worthless upon expiration when the strike price is higher than current prices.

Let us assume that Trader H is bullish on the prices of one-month gold futures and expects prices to rise further from the current level of Rs.1500 per lot. He can buy a gold put option for a month at a strike price of say 1700 rupees after paying a premium to the insurer. The option buyer will always look at ordering the option contract at a strike price that is at the higher end of their market expectations.

Now, much to Trader H’s delight, a month after entering into the contract, the trader finds that the current prices of one-month futures contracts are trading at Rs 1650. He will then exercise his right to sell the underlying gold futures for the month at a strike price of Rs.1700 and a profit of Rs. 50, which is the intrinsic value, over the prevailing market price of the futures contracts. The trader is said to be in the money on the put option when the strike price is higher than the current strike price and the intrinsic value is greater than zero.

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But what if the markets turn aggressively bullish and trader H finds the one-month expiration of the gold futures trading at prices even higher than the strike price, say Rs 1750? In this case, trader H may choose not to exercise his put option or the right to sell the underlying one-month gold futures at a strike price of Rs.1700 when he may incur a notional loss of Rs.50. In this way, the owner reduced his losses by not exercising his right to sell. He only loses the premium amount.

Commodity options are now available on two national exchanges, MCX and NCDEX. Commodity options are great financial tools, especially for small traders, and do not come with Mark-to-Mark futures contracts.

Commodity options are financial contracts with commodities as the underlying asset. It works like stock options, meaning it gives the owner the right to buy or sell the underlying asset at an exercise price at a future date. Currently, the following commodities are available for option trading on exchanges.

How To Trade Commodity Options

To trade commodity options you will need a separate commodity trading account and a commodity DEMAT account, both of which you can now open online with a broker like Angel One.

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Yes. SEBI allowed commodity options trading in 2017. Options on gold, silver, crude oil, copper and zinc can be bought on stock exchanges, MCX and NCDEX. But to trade in the commodity market, you need a commodity trading account and a DEMAT account. Therefore, you should learn how to open a commodity trading account before you start trading

The following seven commodities are suitable for trading in the Indian commodity market due to their growing demand in the domestic and international markets.

Remember that the price of commodities fluctuates with changes in global demand, which means that some commodities may be more in demand than others. So you need to plan your trading accordingly.

Risk is involved in all types of investments and commodity trading is no different. As an investor, you should select investment properties based on your risk appetite. However, understanding the commodity market can be difficult for a new investor at first, so we recommend testing the waters before investing.

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The commodity futures market is highly leveraged and liquid and therefore sometimes even safer than investing in stocks. Start trading with a commodity trading account.

A commodity is anything that is traded on the stock exchange. In India, agricultural products, metals, energy and even natural gas can be traded on stock exchanges.

The commodity market works just like any other market, where commodities are traded either physically or through contracts for a future date. You can invest in the commodity market through commodity exchanges such as MCX, IEX, NCDEX.

How To Trade Commodity Options

Commodities are a good asset class to diversify your portfolio. But for that you will have to open

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