Options Trading in Commodity Futures – Axis Direct
Mar 16, 2018 | Source: ETMarkets.com
Options Trading – Commodity Futures
It is a derivatives product like a futures contract, but different, in that risk is limited for a buyer, while profit is unlimited. For the seller return is restricted to premium buyers pay to buy an option that gives them the right to buy (call option) or right to sell (put). The seller has an obligation to buy from the put buyer or to sell to the call buyer.
In India, options are European style, which can be exercised only upon maturity of the contract. The American style options can be exercised any time over the life of a contract.
Yes , but unlike in the equity market where options settle at the cash market rate of stocks or indices, options in the commodity market will be settled at the futures price on expiry with an option for holders to convert their positions to futures contracts.
This is because unlike in the equity segment, where SEBI regulates the cash market, in Agro-commodities, SEBI regulates only futures and not the cash market, which is the preserve of individual state governments. SEBI recently approved options trading in the commodity futures market. The step is expected to offer a cheaper tool for farmers and speculators than futures contracts.
The extent of change might not be much if participation is not broad-based. Currently, SEBI and RBI do not allow institutional participation by mutual funds or banks. Most participants are retail-level traders. But the introduction will be a good tool for speculators, who provide depth to the market by taking on the risk that hedgers seek to protect themselves against. It might also facilitate farmer participation through aggregation.
Those options that end out of the -money at expiry will be squared off at a loss. Holders of options ending in-the -money will have a choice to either square off at a profit or to convert into a futures position. Most, it is believed, will prefer to square off rather than exercise to convert to a futures position, which entails higher margining and risk requirements