In the history of the Indian market, the commodity derivative market came into existence in the year 2017, after a huge demand from the traders; SEBI approved Commodity Options Trading in India. The first commodity allowed for trading was gold (in a lot of 1 Kg) in October 2017.
We will first understand what options are and then we will move forward in - what is commodities options trading in India.
Options can be defined as the right to sell or buy the underlying asset, but are not obliged for the same at a prefixed price on the day they expire.
There are 2 types of options: One - American and the second -European. The American option can be exercised anytime till the expiry, and the European option may only be applied on the day of expiration. India follows the European style option and can be exercised on the last Thursday of every month.
Commodity trade options are contracts having the right to either buy or sell the commodities at a predetermined price on their expiry date. The commodity trade space works a little differently from that of shares.
In India, only Commodity Futures Options Trading is allowed because the spot or cash market is looked after by the state government and SEBI looks after the Commodity derivatives market.
Commodity Options Trading Strategies:
There are majorly 3 types of Commodity Options Trading Strategies in the market, which you must know if you are a beginner. We will see all of them in brief.
Commodity trading strategies use various technical analysis charts and many other metrics to conclude entering into market and exiting the market.
Range Trading: In range trading strategies, generally traders buy the commodities when the price of the commodity is at its bottom line, and try to sell when they reach the top; the only tough task in this strategy is to define the time correctly.
Breakout trading strategy: This is yet another Commodity trading strategy; a trader can exercise this strategy when trends in the market are strong and visible. A trader buys the commodity just before the prices are about to go up and sells them immediately before they try to come down. In this strategy, the profit margin may be low, but if a trader has a huge quantity, he can see a handsome profit.
Fundamental trading strategy: This is the commodity strategy that relies on market fundamentals and does not consider any technical analysis parts. Based on the market fundamentals a trader takes decisions of purchasing or selling the underlying commodity.
Commodity Futures Options Trading:
Let us first understand the concept of Commodity Futures Options Trading. A futures contract is a legal contract or agreement to either buy or sell a specific commodity at some fixed price on the day of its expiry.
The buyer - in this future contract is signing the contract to buy and receive the underlying commodity at the time of expiration of the contract.
In the same way, the seller - In the futures contract is obliged to sell and deliver the underlying commodity on the date of expiry of the contract.
As the market is very volatile and if a trader invests directly in Commodity Futures Options Trading, it can be a bit risky if you do not have any previous experience. A trader may get a huge potential profit out of that, but if the trade goes wrong then losses will also be huge, you may even lose your initial deposit.
It is advisable to use the Commodity Options Calculator to get an accurate figure before exercising anything.
There are 2 types of investors that practice commodity (futures) trading, commercials and financial institutions that use commodities for speculating.
There are many other instruments in the market that give equal opportunity to earn and also come with a lesser amount of risk. Commodities are always considered to be risky investments, as a lot of uncertain factors affect them. The factors like difficulty in predicting the movement, Weather, epidemics, and natural and man-made disasters are some examples.
That is the reason we always recommend using the Commodity Options Calculator, as it can give you a brief overview, if not exact, of whether it is worth trading or not. You can find much free software or if you are taking help from some financial institute they might have their own Commodity Options Calculator on their official website which can help you decide whether to enter the market or take an exit.
We hope you must be clear about Commodity Options Trading in India, what system India follows, how to trade in the commodity market using Commodity Options Trading Strategies, and what are the risks involved in the commodity market. If you have any queries, you may write to us using the below comment box. Thank you.