Gold Silver Reports — Options to have futures as underliers; one option each in agri, non-agri to be launched initially

Options, one of the most significant drivers for the 14year-old commodity futures market, was given the green light formally by Sebi on Tuesday. Market participants speculate that the country’s only listed commodity bourse MCX is ready to launch options on gold futures in a few weeks. NCDEX, the country’s largest agri futures bourse, could opt for options on soyabean futures, to begin with in two months’ time. While MCX CEO Mrugank Paranjape was not available to comment, NCDEX CEO Samir Shah said the underlier would be futures in the edible oil or oilseeds’ category based on its relevance to hedgers and farmers. Both agri and non-agri options contracts will have to be approved by Sebi.

Only the top-5 traded futures contracts in terms of turnover in the preceding 12 months will be eligible as underliers for options. The average daily turnover for agri and processed agri futures should be . 200 crore and ` . 1,000 crore for ` other commodities.

Unlike in equities, where exchanges like NSE and BSE offer options which are cash settled at spot Nifty and Bank Nifty values, commodity options will devolve into futures days before contracts enter the tender or delivery period. A holder of a call or put option would be able to square off his position prior to exercise, or conversion of the option to a futures position. The position limits of options will be twice those of the relevant futures contracts.

Options that are classed as close to the money (CTM) and in the money (ITM) will be eligible for conversion to futures contracts.Conversion would entail the option holder seeing a substantial mark-up in price to hold the position. This is because, as opposed to the premium paid for the call or put option, the devolved futures contract will involve the client putting up a margin way higher than the erstwhile options held.

Exchanges would sensitise clients whose positions are ITM and likely to be exercised about the higher margin or even collect increased mar gins in the last few days before exercise.

Upon exercise, the holder will get two days to pare positions in line with those of the futures contract. Conversion is expected to happen few days before the tender or delivery period. Close to money (CTM) options include at the money (ATM) options, which are closest to the daily settlement price of the futures contract. Two strike immediately above or below the ATM options will also be deemed to be CTM contracts. ITM options will be automatically exercised unless the broker receives instructions to the contrary. CTM options can be exercised only upon express instructions from the client.  — Neal Bhai Reports

Sebi Issues Guidelines for Options in Commo Futures | Gold Silver Reports