Options trading

Sebi on Tuesday allowed options trading in commodities to deepen the market but will permit each exchange to launch options on futures of only one commodity initially and asked bourses to follow robust risk management measures.

Putting in place strict eligibility criteria, Sebi said options could be launched on futures contract of only those commodities that are among the top five in terms of total trading turnover value of previous 12 months.

A futures contract is an agreement between a buyer and seller of the contract that some asset – such as a commodity, currency or index– will bought/sold for a specific price, on a specific day, in the future (expiration date). An option is a contract to buy or sell a specific financial product known as the option's underlying instrument or underlying interest.

The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised, or acted upon. Contracts also have an expiration date. When an option expires, it no longer has value and no longer exists. Options come in two varieties, calls and puts. You can buy or sell either type.

You decide whether to buy or sell and choose a call or a put based on objectives as an options investor. If you buy a call, you have the right to buy the underlying instrument at the strike price on or before expiration. If you buy a put, you have the right to sell the underlying instrument on or before expiration.

In either case, the option holder has the right to sell the option to another buyer during its term or to let it expire worthless, according to optionseducation.org. The main fundamental difference between options and futures lies in the obligations they put on their buyers and sellers.

An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration, according to Investopaedia.

There are three commodity bourses in the country, namely, metal and ener gy bourse MCX, NCDEX (agriculture) and NMCE (plantations).