How introduction of options will affect commodity markets
Finally, the wait is over for Commodities Market as MCX is all set to launch Options in Gold in the month of October. This will be a game changer for the commodities market as it will result in the participation of new players in the market as it carries low risk with it as compares to Futures.
Let’s have a basic understanding of Option First.
An option is a financial derivative that represents a contract sold by one party (the option writer) to another party (the option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).
Let’s have a basic understanding of Option First.
An option is a financial derivative that represents a contract sold by one party (the option writer) to another party (the option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).
Main Advantage of Option over Future
In future trading, the trader is exposed to big losses whichever side of the contract you are on. If you have the obligation to buy an underlying security at a fixed price and the security moves significantly above that fixed price, then you could lose substantial sums. Conversely, if you have the obligation to sell an underlying security at a fixed price and the security moves significantly below that fixed price then you could experience sizable losses.
If you are writing options contracts and taking on an obligation to either buy or sell an underlying security at a fixed price, then you are exposed to similar risks. However, you can trade options purely by buying contracts and not writing them. This means that you can limit your potential losses on each and every trade you make to the amount of money you invest in buying specific contracts. Whenever you buy options contracts, the worst case scenario is that they expire worthless and you lose your initial investment.
Another big advantage options trading offers is versatility. There are a number of strategies that you can use to create spreads that enable you to profit from multi-directional price movements. For example, you could create a spread that would result in profit if the underlying security went down in value a little bit, or if it stayed stable, or if it went up in value by any amount. This would only result in limited losses if the underlying security went down a significant amount.
With futures contracts, you can typically only make money from the underlying security moving in the right direction for you. There could be unlimited losses if your investment moves in the wrong direction or if a neutral result occurs.
The launch of options will boost overall market participation and also complement the existing futures and make the commodities market more robust and efficient. The combination of futures and options can give market participants the benefit of price discovery of futures and simpler risk management of options.
If you are writing options contracts and taking on an obligation to either buy or sell an underlying security at a fixed price, then you are exposed to similar risks. However, you can trade options purely by buying contracts and not writing them. This means that you can limit your potential losses on each and every trade you make to the amount of money you invest in buying specific contracts. Whenever you buy options contracts, the worst case scenario is that they expire worthless and you lose your initial investment.
Another big advantage options trading offers is versatility. There are a number of strategies that you can use to create spreads that enable you to profit from multi-directional price movements. For example, you could create a spread that would result in profit if the underlying security went down in value a little bit, or if it stayed stable, or if it went up in value by any amount. This would only result in limited losses if the underlying security went down a significant amount.
With futures contracts, you can typically only make money from the underlying security moving in the right direction for you. There could be unlimited losses if your investment moves in the wrong direction or if a neutral result occurs.
The launch of options will boost overall market participation and also complement the existing futures and make the commodities market more robust and efficient. The combination of futures and options can give market participants the benefit of price discovery of futures and simpler risk management of options.
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