MCX plans options in gold, mock trading in a month

Key challenge for the exchange would be to have enough option writers who takes full price risk

The Multi Commodity Exchange (MCX), India’s largest commodity bourse, intends to introduce options trading in the non- agricultural segment. It aims to begin this with gold, among the most traded on the bourse.

The Securities and Exchange Board of India (Sebi) had on September 28, on completing one year of being the regulator in commodity derivatives, too, had said it would allow commodity exchanges to offer options in individual commodities. However, on the recommendation of an internal panel, it has decided to initially allow options in only one agricultural and one non-agri commodity. It is yet to clarify whether both may be offered by the same bourse.

Sources in the know say the permission for options would likely be given in a commodity where liquidity and hedging participation is good. Hence, it is likely that MCX will get permission for introducing options in one non-agri commodity (most of its volumes come from this segment) and that the National Commodity and Derivatives Exchange, with expertise and market leadership in agri commodities, will get the okay in on commodity on that side.

MCX has identified gold and crude oil as priorities for non-agri. And, crude palm oil and cotton for agri, as and when permitted. The choice is based on market response, liquidity in these commodities etc, explained the source.

Mrugank Paranjape, managing director of MCX, said: “We are technologically well prepared for options trading and should be able to start mock training in a month or so. Our first preference will be for gold.”

The Sebi chairman had told reporters in end-September “whatever type of options are permitted in equity derivatives would be permitted in commodities”. The equity market has month-end expiry in options. Another issue is whether commodity options will have delivery-based settlement; there is none for equity derivatives. MCX is preparing its proposal, considering all parameters, it is learnt. It is in discussion with market participants, and has also begun educating them, including hedgers, on options and its uses.

The challenge for the exchange would be to have enough option writers who take full price risk. The jobbing class is most prepared, by the initial feedback.

Sebi has left it for exchanges to work out plans to keep options liquid; differences between buy and sell price should not be too wide. It is waiting for applications and plans from exchanges on options, sources said.

OPTIONS EXPLAINED

• Options are of two types, call and put
   
• The buyer of a call option expects prices to rise; that of a put option expects prices to fall
   
• An options buyer pays a premium and his risk is limited to the premium paid. An option writer or seller quotes a premium and sells at this offer; he also takes the whole risk of price movement