Just like futures, options are also derivative instruments. In a futures contract, both buyer and seller are obligated to fulfill the contracts. However, an option agreement gives the buyer or the seller the right to transact, but there is no obligation of doing the transaction.
In commodities, where prices are so volatile, options trading is like a deposit on the futures contract. The buyer or the seller can save oneself from losing too much if at all the futures contract becomes unprofitable for him/her.
SEBI (Securities and Exchange Board of India) recently allowed options trading in commodities trading in India, but unlike equity options, traders in the commodity market will be settled at the futures price on expiry with the option holder converting their positions into futures contract.
The MCX (Multi Commodity Exchange) has received capital markets regulator SEBI’s approval to launch options on gold, said reliable sources.
It is being that SEBI approval to launch options came in early August. MCX has been engaged with the members from past more than a month of mock trading sessions to prepare the market for options. We can expect MCX to launch options by September or October. But, the exchange hasn’t finalized a date yet. MCX is ensuring that hedges and members are ready to trade in options before that. All the systems at the exchange level are ready for the launch.
SEBI allowed and issued rules for the launch of commodity options on 14 June. As of now, only one commodity option per exchange is allowed on a pilot basis.
As per SEBI rules, non-agri commodities need to have an average turnover of Rs. 1,000 crore and the commodity should be in the top five list on the basis of daily turnover. Depending on these criteria, MCX chose gold, which is the most liquid commodity on its platform.
On April 26, SEBI cleared the issues around settlement by finalizing changes to the SECC (Stock Exchange and Clearing Corporation) regulations and Securities Contract Regulation Act.
After the amendments in rules, exchanges are structuring the options with futures contracts as underlying. That means option contracts would be converted to futures on the day of expiry.
Previously rules allowed for settlement of options only via cash or physical delivery. That sat a logistic hurdle and was not in line with global practices.
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