Options in commodities trading: How will them help you
Wed, 28 Sep 2016 08:12:59 -0600
So far, the only instrument available in commodity derivatives was futures on individual commodities
Market regulator Sebi on Wednesday introduced options contracts in commodity trading.

Allowing the commodity exchanges to start options contracts in commodity derivatives, Sebi said it would issue detailed guidelines in this regard shortly. Sebi has also decided to form an advisory panel for regulation of the new instrument.

So far, the only instrument available in commodity derivatives was futures on individual commodities. The new product is considered conducive for the overall development of the commodity derivatives market and is expected to draw broadbased participation, enhance liquidity, facilitate hedging and bring more depth to the commodities market.

Finance Minister Arun Jaitley had announced the plan to introduce options in commodity trading in the Union Budget for 2016-17.

Sebi has asked the commodity exchanges to communicate to it the status of implementation of the new product. They will have to take prior approval from Sebi before launching any options product. Commexes will need to amend their byelaws and rules to make the switch.

“Though a bit late, Sebi has finally fulfilled its promise to strengthen and grow the commodity markets. We have seen an array of circulars coming from Sebi over this week mostly reinforcing some of the old circulars and some to give more clarity to participants,” said Kishor Narne, Head of Commodities & Currencies, Motilal Oswal Commodities.

Options have been a long-pending demand and by allowing them Sebi has sent out a clear signal that it wants to take these markets ahead and make them hedger / user friendly.

“Options would certainly enhance the participation by reducing risk and costs of hedging by companies thus increasing corporate participation and also allows investors or speculators to increase the participation by combining the futures and options, last but not the least it gives a chance for the farmers who to come on to the exchange platform to secure their earnings through hedging on exchange which would now cost them minimum and without any risk. Overall enhanced participation means better price discovery and good health of the markets,” Nene said.

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