The National Commodity Derivatives Exchange will start trading options on wheat, maize and rapeseed-mustard seed based on spot prices from Monday. Subsequently, the exchange will suspend the current options on futures in guar gum, soyabean, refined soya oil and chana.
Unlike the current options contract that devolves on futures trading on expiry, the new ‘options on goods’ would be settled through physical delivery.
Earlier, NCDEX became first exchange to launch options in agriculture goods. Two options contracts expiring in October and November in rapeseed – mustard seed, wheat and maize would be available for trading from Monday.
Just like crop insurance protect the production risk, farmers can hedge their price risk by buying a ‘put option’ even while they start sowing. Depending on the volatility of the commodity, they have to shell out a premium that varies 3-4 per cent of their price expectation.
On expiry of options contract, if the commodity price in the open mandi is higher than the price hedged by the farmer, he can deliver it mandi and forgo the premium paid for the options position. Else he can give the commodity delivery on the exchange and book his profit.
The contract specifications in all the three options contracts launched will be similar to that of futures and the exchange will fix margin on the options writer.
Vijay Kumar, Managing Director, NCDEX, said the new options contract launched is best suited for farmer producers organisations and corporates to hedge their price risk.
The exchange has sought permission from SEBI to launch options on spot in guar gum, soyabean, refined soya oil and chana.
In fact, he said banks can protect farm loan by insisting farmers to hedge their price risk by buying ‘put options’ on the exchange platform.
Earlier, SEBI has mandated that option on any commodity can be launched only if it records a minimum monthly average turnover of ₹200 crore in futures market. However, there is no such trading limit for exchanges to launch options on goods.