MCX, NCDEX may launch Europe-style options by January

Mumbai: The board advisory committees of commodity exchanges MCX and NCDEX have discussed launching Europeanstyle options on either gold, copper or crude futures in the non-farm segment and one on refined soya oil, guar or cotton futures on the farm segment, people aware of the development told ET.

ET learns from MCX that the exchanges could infor m Sebi (Securities and Exchange Board of India) about their decision on options by November-end and that trading of options could start by January, before the Union Budget gets tabled in the Parliament. A European style option can be exercised only on maturity unlike an American style option that can be exercised anytime during the contract life.

Last month, Sebi said exchanges will be allowed to launch one option each in the farm and non-farm segments. The modalities of the options are being worked out by the respective exchange boards.

“As the Commodities Derivatives and Advisory Committee (CDAC) is yet to formally finalise the criteria for selecting commodities for launching options, we may be able to approach the regulator for approval sometime towards end of November, “said an MCX spokes person without confirming the commodities on which options would be launched.
“Realistically, we will be able to launch in one of the more liquid commodities by January next year. Whether the options will be delivery or non-delivery based, it totally depends on the regulator whether it allows the options to be settled in cash on expiry dates or merge into futures contract as the settlement nears.“ “The options will most likely be European style, which can be exercised upon maturity ,“ said one of the persons cited earlier. “Discussions ranged from making them cash settled initially, letting them expire three days prior to expiry of the futures contracts and giving buyers the option of taking delivery by converting to a futures contract.“

Gold futures contracts on MCX, for instance, expire on the fifth of every other month. In that case, the option could be cash settled on the second. Buyers wanting delivery could switch to a futures contract, in case he decided on taking delivery. However, even then he could have the option of squaring off and not taking delivery over the three-day period.

“The Exchange can share details of its plan to launch options only after receiving regulatory approval,“ said an NCDEX spokesperson.“We are extremely excited about this and believe it will help expand the product basket and make it attractive for new participants.The Exchange is fully prepared for the launch of options and has also invested in next generation trading technology, gearing towards providing unrivaled levels of performance.“

Finance Minister Arun Jaitley had referred to Sebi working on introducing options in the Budget for FY17.

Options unlike futures contracts are less risky for buyers (very risky for sellers or writers who earn premium from the buyer) and considered a better tool for hedging price risk. Notional turnover on options on leading stock exchange NSE accounted for 82% of total turnover in the fiscal year to date.

“Daily volumes of currently `25,000-30,000 crore on commodity exchanges could surge once options trading takes off,“ said DK Aggarwal, CMD, SMC Comtrade.