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Commodity Options Trading

Commodity options trading :

How to Trade in Commodity Options ?

Options are defined as a contract between two parties wherein the two parties (buyer and seller) enter into an agreement, which gives the option buyer, the right but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date. The asset can be stocks, indexes, commodities, futures, or interest rate.The two types of options are call and put. When the buyer has the right to buy a certain quantity of the underlying asset at a determined price on or before a particular date it is known as a call. In put, the buyer gets the right to sell a certain quantity of the underlying asset at a determined price on or before a particular date.The concept of options is not currently available in the Indian commodity market, not even online commodity trading though there are indications that the Securities and Exchanges Board of India (SEBI) is considering introducing it in the MCX and other exchanges. Introduction of options trading is expected to throw up benefits like -
  • Increase in liquidity
  • Bring in more depth to the market
  • Open up participation to new players
Commodity options as a risk management tool:Commodity options are considered a good choice for risk-averse groups like farmers and small to medium enterprises. This will also prompt banks and financial institutions to come up with new offerings for the farming sector. Such schemes are expected to benefit agriculturists in terms of higher incomes and employment generation.

Options complementing futures trading:Combinations of futures and options can prove more effective. It can lead to a reduction of variability in the distribution of returns.
Increased liquidity benefits:In addition to increasing liquidity, commodity options can lead to lower impact cost, better market stability, reduced volatility, and better price discovery to name a few.Seeing as how the benefits far outweigh the disadvantages, the introduction of commodity options in India seems a desirable move. If SEBI goes ahead with the move, it is sure to garner the support of commodity stakeholders, particularly the smaller players.

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