MCX's gold options turnover hits year's low on volatility, contract sizes

Volumes fell as volatility moderated, contract sizes as large as Rs 31 lakh deter retail participation

The turnover from options contracts on the Multi Commodity Exchange of India (MCX) has declined to hit a one-year, with the daily average at Rs 434 crore in April 2019, compared with Rs 727 crore in May 2018. The turnover was lower even on sequential basis, with the March 2019 figure coming in at Rs 591 crore.

One reason for the decline is that size of some contracts was higher for retail investors. Besides, with volatility in gold having moderated, there was a drop in volumes, although open interest in gold options was very good, even as volatile crude options fared well. Thirdly, volumes also feel as the the gold contract expired in April.

“Retail participation is required to make options contracts successful, and to achieve this, the investment size should be small. A trader requires an investment of Rs 30-31 lakh to trade in gold options, which is a lot of money. This is why such contracts are not regarded as investor-friendly. By contrast, however, the crude oil options contract has been successful due to a small investment size of around Rs 5,000. Consequently, the turnover in gold ‘options’ has declined while that in crude oil has shot up sharply,” said Kishore Narne, Associate Director, Motilal Oswal Financial Services Ltd.

MCX currently offers options trading in copper, crude oil, silver, gold and zinc. National Commodity & Derivatives Exchange Ltd (NCDEX) offers options trading in guar seed, which is yet to pick up among traders and investors.

Initially, the exchange offered liquidity enhancement scheme (LES) with the launch of options contracts. But, the LES was withdrawn later.

The overall turnover across all options contracts on MCX remained highly volatile.

Said an MCX spokesperson, “MCX gold options have been emerging as a popular hedging tool among stakeholders. The instrument is gaining impetus alongside MCX crude options.” He added, “The month March 2019 had been a very active one for MCX gold options, as open interest was ay an all-time high of 4.65 tonnes. This can be attributable to the increased hedgers’ activity ahead of closure of financial year and owing to price moves following currency movements. Besides that January and March happen to be expiry months for MCX bi-monthly gold options.”

The volatility in options contract turnover also coincides with the settlement gold futures contracts. According to trade sources, the settlement month of futures contract see lower trading volume than non-settlement months.