MCX launches options trading in gold on Dhanteras
18 Oct 2017
Finance minister Arun Jaitley formally opened gold options trading on commodity bourse MCX, on the occasion of Dhanteras, on Tuesday, in a major step towards formalising options trading and opening the possibility of expanding it to cover other commodities as well.
Under the gold options contract, trading will be allowed in 1 kg of gold, thereby giving small investors the chance to participate.
"This marks a very important evolution in trading of yellow metal itself. It hedges all risks by giving them (traders) the option of futures," Jaitley said after launching the options trade on the auspicious day of Dhanteras.
"I am sure more it formalises, better it is for consumers, jewelers and those trading in this. That's in consonance with the business environment for future that we see for us," Jaitley added.
Market regulator SEBI allowed trading in gold options for the first time 14 years after commodity exchanges commenced operations in the country.
Option is an instrument that gives the buyer a right to buy or sell an underlined commodity at the present price on a future date – a form of price insurance for hedging price volatility.
They are of two types of options - call options which gives one the right to buy at a fixed price later (right to buy) and puts option which gives the seller to sell at a fixed price at a later time.
The investor benefits if the expectation of price movements comes true. The European-styled gold options will be hedger-friendly and physically settled, MCX said in a statement. The gold options contracts on MCX, which started on Tuesday, will expire on 28 November and 29 January.
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. 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.
According to MCX chairman Mrugank Paranjape, the launch of commodity options in gold is most significant reform measure.
The finance ministry had set up a committee for suggesting measures to transform India's gold market, said MCX chairman Saurabh Chandra.
''There has been a very conscious effort by the government and SEBI to develop and integrate commodity markets in a phased manner... 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,'' he said.
To further strengthen the market, a panel had been constituted in NITI Aayog to integrate spot and derivative markets, he added.
Describing the gold option as ''an extremely low-cost product,'' Paranjape said, ''As an introductory measure, we are not charging any transaction fee on this product till December.''
From the MCX's point of view, that time period would be good enough to develop the market, he added.
Paranjape also said the exchange was likely to seek SEBI's nod for options trading in other commodities as well, including silver, copper, crude palm oil, zinc and cotton.
