In a major step towards formalizing trade in yellow metal, Finance Minister Arun Jaitley allowed gold options trading on the leading commodity bourse MCX on the occasion of Dhanteras. Under the gold options contract, trading will be allowed in 1 kg of gold, thereby giving small investors the chance to participate.
"This marks a very important evolution in trading of yellow metal itself. It hedges all risks by giving them (traders) the option of futures," Jaitley said right after launching the options trade on the auspicious day of Dhanteras.
"I am sure more it formalises, better it is for consumers, jewelers and those trading in this. That's in consonance with the business environment for future that we see for us," Jaitley added.
Trading in gold option has been allowed by the regulator SEBI after 14 years of commencement of commodity exchanges in the country.
Option is an instrument that gives the buyer a right to buy or sell an underlined at a present price on a future date. It is akin to a form of price insurance and, therefore is best suited for hedgers. They are of two types: calls (right to buy) and puts (right to sell). If an investor sees gold prices rising, then he can buy into a call option and take a position in a put option if he expects a bearish trend.
The investor benefits if the expectation of price movements comes true. The European-styled gold options will be hedger-friendly and physically settled, MCX said in a statement. The gold options contract will trade from Tuesday and will expire on November 28 and January 29.
Gold options will have a position limit of 10 tonnes for clients and 100 tonnes for members.
This price range covers wide price movements during contract time but most liquidity and trading usually happens at ITM or the price around which relevant futures are traded. Traders can hedge their risks at a fraction of the cost in options compared to futures contracts. The launch of options is also expected to boost volumes in futures contracts.
According to MCX Chairman, Mrugank Paranjape, the launch of commodity options in gold is most significant reform measure.