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The decision to allow options trading in commodities is nothing but another populist move by the reform-oriented government to buoy the financial market.
For beginners, option trading is like a life insurance policy taken by the common man by paying a small premium. In case of death within the insured period, the insurance company pays the assured amount. If not the loss is only the premium paid.
However, the decision to allow options trading in commodities appears to have been taken in haste, particularly when market regulator SEBI has not allowed the launch of any new product since it has taken over.
The large-scale speculation in the commodity futures market has forced SEBI to ban trading in two commodities — castorseed and chana — over the past year due to rampant speculation and cornering of stock by speculators to boost prices artificially.
Tool for speculators And now, giving in to pressure from commodities exchanges, it has allowed trading in options. This will only provide a tool for speculators to minimise their risk and speculate prices more efficiently.
In the case of options, speculators can take position by paying a small premium unlike in futures, where a huge amount has to be set aside. The Centre and market regulator could have done more good for the commodity market by allowing institutional investors, banks and mutual funds to participate in the futures market to curb speculation.
While the exchanges are happy with the participation of farmers, there is no clear classification of market participants. Just like in the case of futures, options trading is also unlikely to help farmers in any way.
In fact, the Centre already provides option trading facility for farmers by way of fixing the minimum support price.
The farmer has the option to sell his commodity to the government if the price goes below the MSP. If not, he can sell it in the open market.
SEBI needs to have enough safeguard to protect unintended investors being pulled into trade in commodity options as the premium amount to be set aside is expected to be much lower than for futures.
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