An option is a derivative contract which gives the buyer the owner or holder of the option the right, but not the obligation, to buy or sell an underlying. The seller writer of option, on the other hand, bears the obligation to honour the contract should the buyer choose to exercise the option. The option buyer will exercise their option only when the price of the underlying is favourable to them, otherwise they will let the option expire worthless.
As per current regulatory norms, only European style commodity options are available in India at present. MCX offers options on commodity futures contracts traded on the exchange.
There is no mark to market margin calls for option buyers since they pay premium upfront to the option seller. Cost is lesser than taking a futures contract, returns are relatively higher and maximum loss is limited to the premium or price of option, unlike in futures where returns are high and losses can be unlimited.
Unlike equities, commodity options are on futures and not on spot. So we are actually trading a derivative of a derivative. There will be a total of 31 strikes available for trading for every contract launched. Exchange shall levy pre tender margin on the long buy positions entering the option tender period, which starts 2 days prior to option expiry day, and the settlement will happen on Daily settlement price DDR of underlying futures contract on the expiry day of options contract.
This will be in 2 tranches, one to be paid before the option expiry day and other on the expiry day. Yes, physical delivery is optional. ET Secure IT. Cryptocurrency By. Stocks Dons of Dalal Street. Live Blog. Stock Reports Plus. Candlestick Screener. Stock Screener. Market Classroom.
Stock Watch. Market Calendar. Stock Price Quotes. Markets Data. Market Moguls. Expert Views. Technicals Technical Chart. Commodities Views News. In the broadest sense, the basic principles of supply and demand are what drive the commodities markets.
Changes in supply impact the demand; low supply equals higher prices. So any major disruptions in the supply of a commodity, such as a widespread health issue that impacts cattle, can lead to a spike in the generally stable and predictable demand for livestock. Global economic development and technological advances can also impact prices.
For example, the emergence of China and India as significant manufacturing players therefore demanding a higher volume of industrial metals has contributed to the declining availability of metals, such as steel, for the rest of the world. Commodities that are traded are typically sorted into four categories broad categories: metal, energy, livestock and meat, and agricultural.
Metals commodities include gold, silver, platinum, and copper. During periods of market volatility or bear markets, some investors may decide to invest in precious metals—particularly gold—because of its status as a reliable, dependable metal with real, conveyable value. Investors may also decide to invest in precious metals as a hedge against periods of high inflation or currency devaluation. Energy commodities include crude oil, heating oil, natural gas, and gasoline. Global economic developments and reduced oil outputs from established oil wells around the world have historically led to rising oil prices, as demand for energy-related products has gone up at the same time that oil supplies have dwindled.
Investors who are interested in entering the commodities market in the energy sector should also be aware of how economic downturns, any shifts in production enforced by the Organization of the Petroleum Exporting Countries OPEC , and new technological advances in alternative energy sources wind power, solar energy, biofuel, etc. Livestock and meat commodities include lean hogs, pork bellies, live cattle, and feeder cattle. Agricultural commodities include corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar.
In the agricultural sector, grains can be very volatile during the summer months or during any period of weather-related transitions. For investors interested in the agricultural sector, population growth—combined with limited agricultural supply—can provide opportunities for profiting from rising agricultural commodity prices. One way to invest in commodities is through a futures contract.
A futures contract is a legal agreement to buy or sell a particular commodity asset at a predetermined price at a specified time in the future. The buyer of a futures contract is taking on the obligation to buy and receive the underlying commodity when the futures contract expires.
The seller of the futures contract is taking on the obligation to provide and deliver the underlying commodity at the contract's expiration date. Futures contracts are available for every category of commodity.
Typically, there are two types of investors that participate in the futures markets for commodities: commercial or institutional users of the commodities and speculative investors.
Manufacturers and service providers use futures contracts as part of their budgeting process to normalize expenses and reduce cash flow-related headaches. Manufacturers and service providers that rely on commodities for their production process may take a position in the commodities markets as a way of reducing their risk of financial loss due to a change in price.
The airline sector is an example of a large industry that must secure massive amounts of fuel at stable prices for planning purposes. Because of this need, airline companies engage in hedging with futures contracts. Future contracts allow airline companies to purchase fuel at fixed rates for a specified period of time.
This way, they can avoid any volatility in the market for crude oil and gasoline. Farming cooperatives also utilize futures contracts. Without the ability to hedge with futures contracts, any volatility in the commodities market has the potential to bankrupt businesses that require a relative level of predictability in the prices of goods in order to manage their operating expenses.
Speculative investors also participate in the futures markets for commodities. Speculators are sophisticated investors or traders who purchase assets for short periods of time and employ certain strategies as a way of profiting from changes in the asset's price. Speculative investors hope to profit from changes in the price of the futures contract.
Because they do not rely on the actual goods they are speculating on in order to maintain their business operations like an airline company actually relies on fuel , speculators typically close out their positions before the futures contract is due.
As a result, they may never take actual delivery of the commodity itself. If you do not have a broker that also trades futures contracts, you may be required to open a new brokerage account.
Investors are also typically required to fill out a form that acknowledges that they understand the risks associated with futures trading. Futures contracts will require a different minimum deposit depending on the broker, and the value of your account will increase or decrease with the value of the contract. If the value of the contract decreases, you may be subject to a margin call and required to deposit more money into your account in order to keep the position open.
Due to the high level of leverage, small price movements in commodities can result in either large returns or large losses; a futures account can be wiped out or doubled in a matter of minutes. There are many advantages of futures contracts as one method of participating in the commodities market.
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