facebook Get Started with Options Trading in Commodities Market (MCX)

What is Options Trading?

The Options trading is a derivative instrument like Futures which derives its value from an underlying asset. Here it is commodities such as gold, silver, and crude oil.

The Option is the right to exercise (Buy/Sell) the underlying asset at the strike price on expiration date by paying the premium. It has two types namely Call Option and Put Option.

A Call Option is the right to buy and not the obligation to buy the underlying asset at the strike price on the expiration date and Put Option is the right to sell and not the commitment to sell the underlying asset at the strike price on an expiration date.

Uses of Options:

1. Hedging in Options Trading

We can use Option in commodities to hedge the Downside and the Upside risks. The Downside Risk is when we have a Long Position in future or underlying asset. The upside risk is when we have short a position in future or underlying asset.

To hedge a long position or to protect the downside risk, Buy Put Option. Similarly, to hedge a short position or to protect upside risk, Buy Call Option.

Eg: If we have a Long Position in gold future at 28200 and we cannot bear more loss beyond 28000 so instead of putting stop-loss we can buy a put option of 28000 strike price of same expiration as the gold future.

2. Speculation

We can also bet on the market movements using commodities options.

Eg: If we are expecting the market to raise in the coming week we can buy a Call Option. Also, if we are expecting the market to fall in the following week, we can purchase a Put Option.

Real Time Scenario:

Here are our assumptions:

Gold future current rate = Rs.28200

Case 1:

We are expecting the gold price to rise to 28400 level. So, we can buy the call options. And the premiums will be low for higher strike price so if we want to purchase a call option for less premium we can go for a call option with strike price of 28300, which is Out of Money Call.

Call optionPremium Rate
Out of money(28300)Low(10)
At the money(28200)Medium(100)
In the money(28000)High(250)

Case 2:

We are expecting the gold price to fall to 28000 level. So, we can buy the put options. And the premiums will be low for lower strike price so if we want to purchase a put option for less premium we can go for put option with strike price of 28000, which is Out of Money Put.

Put OptionPremium Rate
Out of money(28000)Low(10)
At the money(28200)Medium(100)
In the money(28400)High(250)

If you have any questions, feel free to ask in the comment section.