Finance minister Arun Jaitley on 17th Oct 2017 launched an option's contract in gold on the Multi Commodity Exchange (MCX) on the auspicious occasion of Dhanteras.
Options are an instrument that give the buyer a right to buy or sell an underlined at a present price on a future date.
They are of two types: calls (right to buy) and puts (right to sell).
According to market experts, options are also a much better hedging instrument as compared to futures for hedgers.
Gold option contract, with Gold (1 Kg) futures as underlying, expiring on November 28, 2017 and January 29, 2018 are made available for trading from Oct 17.
The launch denotes one of the most significant reform measures since modern commodity derivatives trading started 14 years ago.
The introduction of options gives a strong impetus towards systematic development and transformation of commodity derivatives market in India, ushering in a new era in price risk management in response to stakeholder expectations.
The industry has waited for this new instrument since year 2003 when then NDA government opened up the Indian commodities market.
More commodities option launch may be in line.
To start with, the options trading will be available on a 1 kg gold futures contract, the exchange said in a statement.
In August, commodity and capital market regulator Securities and Exchange Board of India (SEBI) allowed MCX to launch options trading in gold while the competing agriculture commodity-focused NCDEX was given permission to launch options trading in guar seed.
Traders can hedge their risks at a fraction of the cost in options compared to futures contracts.
The launch of options is also expected to boost volumes in futures contracts.
As with equity derivatives, investors will have two types of options - call and put - to invest.
If an investor sees gold prices rising, then he can buy into a call option and take a position in a put option if he expects a bearish trend.
In both cases, if the expectation of price movements comes true, the premiums on options will go up and investors will benefit.
Each option expiry shall have a minimum 31 strikes available - 15 each for In-the-Money (ITM) and Out-of-Money (OTM), and one At-the-Money (ATM).
Gold options will have a position limit of 10 tonnes for clients and 100 tonnes for members.
This price range covers wide price movements during contract time but most liquidity and trading usually happens at ITM or the price around which relevant futures are traded.
OTM means far from the trading range and ITM means within the trading range.
Interestingly, this development comes exactly after 14 years of futures launch in the country that commenced in 2003.
Gold Option will be available in Mega Gold Contract and not in any other gold variants such as gold mini.
All options on maturity will devolve into futures or become futures contract, if not squared off before the given time-frame.
After it becomes futures, all norms of futures will apply.
