Derivatives

Know your commodity options

Bavadharini KS | Updated on February 13, 2021 Published on February 13, 2021

In commodity options contracts, there are two ways you can trade -- options on futures contract and options on goods. MCX, one of the largest commodity exchanges in the country, offers both. There are few key differences between the two.

One, options on futures contracts are those contracts that devolve into futures contract upon expiry. Here, the underlying for the options contract is the respective commodity’s futures contract. For Zinc options contracts on MCX, for example, the underlying is the zinc futures contracts traded on the same bourseBut options on goods are those contracts with underlying as a commodity. For instance, gold mini contracts on MCX has 100 grams gold bar as underlying.

Unlike the futures contract, the options contract involves premium payment but not initial margin. This premium is the purchase price of the option and buyer will be locked for the price (premium) on real-time basis. Traders of contracts of options on futures could witness a better price discovery. Because the futures has higher participation resulting in higher trading metrics.

But options on goods take cues from spot prices which are polled by the exchange from their network (dealers, traders etc.) from across the country, which may come with a lag.

In options on futures, trader or hedger pays the premium but post-expiry, the margin requirements applicable for a futures contract should be paid, followed by delivery period margin. With options on goods, you pay the premium upfront followed by delivery period margin.

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Published on February 13, 2021
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