HISTORIC LAUNCH OF COMMODITY OPTIONS ON GOLD FUTURES

Transcription

1 HISTORIC LAUNCH OF COMMODITY OPTIONS ON GOLD FUTURES 17 October

2 Gold Options- Contract Specification

3 Gold Options- A Game Changer Commencement of Gold Option Contract with Gold (1 Kg) Futures as underlying Gold Option 28 November 2017 contract and 29 January 2018 contract is available for trading with effect from Today, Tuesday October 17, The life cycle of the options contracts is specified hereunder Source: mcxindia.com

4 Gold Options- Highlights Option on: futures contract Contract size: same as of futures contract which is 1 kilogram Base Value: Rupees per 10 gram Option Type: European Options Delivery type: Deliverable Strike Interval: Rs.100 Total 31 strikes: 15 In-the-money, 15 Out-of-the-money and 1 Near-the-money Conversion: All open positions on last day to be converted into futures contract Expiry: three business days prior to the first business day of tender period of the underlying futures contract. Client limit: 10 Metric ton; Member limit- 100 Metric ton Due Date Rate: Daily settlement price of underlying futures contract on the expiry day of options contract

5 Gold Options- Benefits Gold Options offers an additional platform for trading. The tool can be used as hedging or as spread trading. Contract options allow participants to not only hedge prices, but also to avail of the benefits of upward price movements. Options are always cheaper than futures to trades. Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility. As gold options only grant the right but not the obligation to assume the underlying gold futures position, potential losses are limited to only the premium paid to purchase the option. Positions carried till expiry could be converted into futures.

6 Gold Options- Costing Brokerage Nil Exchange transaction cost Rs.100/ crore Stamp duty for both buyer and seller 0.05% CTT on premium to be paid by seller of Options 0.125% CTT on final settlement price to be paid by the buyer on exercise Premium of buyer shall be blocked upfront on real time basis 3.5% Margin for Short Option- 2.5% Minimum margin, 1% Extreme loss margin One Day before expiry, 25% of futures margin to be paid to exchange (if gold futures margin is 5%; 1.25% to be paid to the exchange On day of expiry, 50% of futures margin is applicable Once option converted into futures, rest of futures margin i.e. 50% is to be paid to the exchange

7 Gold Options- Expiry Devolutions Settlement process of Gold Options on expiry of options contract, the open position shall devolve into underlying futures position as follows: Long call position shall devolve into long position in the underlying futures contract Long put position shall devolve into short position in the underlying futures contract Short call position shall devolve into short position in the underlying futures contract Short put position shall devolve into long position in the underlying futures contract All such devolved futures positions shall be opened at the strike price of the exercised options

8 Gold Options- Terminology At-the-Money: The point at which an option's strike price is the same as the current trading price of the underlying commodity. Call: An option contract giving the buyer the right, but not the obligation, to purchase a commodity or other asset or to enter into a long futures position. Delta: The expected change in an option's price, given a one-unit change in the price of the underlying futures contract or physical commodity. Exercise: To elect to buy or sell, taking advantage of the right conferred to the owner of an option contract. Expiration: The date on which an option contract automatically expires; the last day an option may be exercised. In-The-Money: The state of an option contract in which it has a positive value if exercised. Intrinsic Value: A measure of the value of an option if immediately exercised; the extent to which it is in-the-money. Out-Of-The-Money: The state of an option contract in which it has no intrinsic value. Put: An option contract that gives the holder the right, but not the obligation, to sell a specified quantity of a particular commodity or other interest at a given, prior to or on a future date. Spread: The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity. Straddle: The purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity. Strangle: An option position consisting of the purchase of put and call options having the same expiration date, but different strike prices. Synthetic Futures: A position that mimics a futures contract that is created by combining call and put options. Time Value: That portion of an option's premium that exceeds the intrinsic value, reflecting the probability that the option will move into-the-money. Writer: The issuer, grantor or seller of an option contract. Premium: The payment an option buyer makes to the option writer for granting an option contract. Source: investopedia.com

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