MCX India has announced the launch of Options Trading in Copper after the approval of SEBI on 21 May 2018.
At the outset, the recent launch of Crude Oil on 15 May 2018 had a positive impact in the commodity market and was a prospective move for the trading industry. Mr.Ponmudi, Managing Director of Enrich Financial Group and a well renowned Market Analyst had predicted clearly the positive momentum that would reflect towards this move.
Before we look into the impact of Options trading in Copper, let’s have a glance about the ductile, corrosion-resistant, malleable, metallic element that is an excellent conductor of heat and electricity.
The flexibility of this beautiful metal makes it one of the world’s most useful natural resources. Combined with other metals, it can acquire added priceless characteristics such as hardness, tensile strength and superiorresistance to corrosion.
What is the Statistics of Copper in the Indian Market Scenario?
Hindustan Copper Limited (HCL) in public sector, Sterlite Industries (Vedanta Company) & Hindalco Industries in private sector are the three major companies which dominate the Copper Industry in India.
According to the Annual Report 2017-18, Ministry of Mines, Government of India:
India's consumption demand for refined copperstood at 820 thousand tonnes in the FY16.
Copper ore production in India stood at 3,846thousand tonnes in 2016-17.
The production of copper concentrates at 135thousand tonnes decreased by 11% in 2016-17 as compared to that in the previous year.
What is Options Contract and what are the salient features?
Options Contract is an agreement which gives the buyer the right but not the obligation to buy or sell an underlying at a certain price on or before a certain date. Only the seller is obligated to honour the contract on expiration. The margin is maintained only by the margin writer. Requires upfront fixed premium from the buyer. Option buyer has limited risk and option writer has unlimited risk.
What are the factors that would influence the Market?
Fluctuations in USD-INR
Crisis, recession and inflation
Prices ruling in the international markets
Economic factors: industrial growth, global financial
Commodity- specific events: construction of new production facilities or processes, new uses or the discontinuance of historical uses, unexpected mine or plant closures (natural disaster, supply disruption
What are the benefits involved by the launch of Copper trading?
The launch of Copper trading as predicted by Mr.Ponmudi would bring in a lot of impact in the commodity trading industry similar to Crude oil. Some of them are listed below:
It would be beneficial for upside and downside trading.
The involvement of hedging strategy among the market participants would prove to be higher.
The number of marketparticipants trading in Copper Options would increase radically.
Good volume of trading can be expected.
Those trading in equity segment would also be attracted to trade in Options copper trading.
The volatility would be high and the liquidity will also be more.
This would be a healthy move for the trading industry.
For trading in Copper, full span margin is required, whereas for trading in Copper options, the premium amount is sufficient.
Lowest investment shall yield highest returns.
Limited risk = Unlimited profit
Hedging technique can be used to minimise risk in options trading.
Brokerage will be lower in trading copper options when compared to trading in copper futures.
CTT charges will be lower in options trading
Writing off can be carried out in options trading and as there are many strategies involved, a decent profit can be obtained.
Retail participation would be more.
In the closing note thanks to SEBI for its approval.
Specifications of MCX Copper Options Contract with Copper Futures as Underlying
Underlying: Underlying shall be Copper Futures contract traded on MCX
Expiry Day (Last Trading Day):Two business days prior to the Expiry day of the underlying futures contract
Trading Period: Mondays through Fridays | Trading Session: Monday to Friday: 10.00 a.m. to 11.30 / 11.55 p.m.#
Trading Unit: One MCX Copper futures contract | Underlying Quotation/ Base Value: `/Kg
Underlying Price Quote:Ex – Bhiwandi (exclusive of all taxes and levies relating to GST, import duty/customs and local taxes if any etc.).
Strikes:7 In-the-money, 7 Out-of-the-money and 1 Near-the-money. (15 CE and 15 PE). The Exchange, at its discretion, may introduceadditional strikes, if required.
Strike Price Intervals:` 5.00 | Tick Size (Minimum Price Movement): ` 0.01
Daily Price Limit:The upper and lower price band shall be determined based on statistical method using Black76 option pricing model and relaxedconsidering the movement in the underlying futures contract. In the event of freezing of price ranges even without a correspondingprice relaxation in underlying futures, if deemed necessary, considering the volatility and other factors in the option contract, the DailyPrice Limit shall be relaxed by the Exchange.
Margins: The Initial Margin shall be computed using SPAN (Standard Portfolio Analysis of Risk) software, which is a portfolio based marginingsystem. To begin with, the various risk parameters shall be as under:
A. Price Scan Range – 3.5 Standard Deviation (3.5 sigma)
B. Volatility Scan Range – 3.5 %
C. Short Option Minimum Margin – Minimum of 2.5% subject to Margin Period of Risk (MPOR) (i.e. 2.5% *√2 currently)
D.Extreme Loss Margin – 1% (to be levied only on short option positions)
E. Premium of buyer shall be blocked upfront on real time basis
The Margin Period of Risk (MPOR) shall be at least two days.Parameters would be reviewed and changed, if required
Mark to Market: The option positions shall be marked to market by deducting / adding the current market value of options positions (positive for longoptions and negative for short options). Mark to Market gains and losses would not be settled in Cash for Options Positions.
Maximum Allowable:Position limits for options would be separate from the position limits applicable on futures contracts.
Open Position: For client level: 14,000 MT or 5% of the market wide open position, whichever is higher - For all Copper Options contracts combinedtogether.
For a member level: 1,40,000 MT or 20% of the market wide open position, whichever is higher - For all Copper Options contractscombined together.
Upon expiry of the options contract, after devolvement of options position into corresponding futures positions, open positions mayexceed their permissible position limits applicable for future contracts. Such excess positions shall have to be reduced to the permissibleposition limits of futures contracts within two trading days.
Exercise Mechanism at expiry:All option contracts belonging to ‘Close to the money’ (CTM)* option series shall be exercised only on ‘explicit instruction’ for exercise bythe long position holders of such contracts. All In the money (ITM) option contracts, except those belonging to ‘CTM’ option series, shallbe exercised automatically, unless ‘contrary instruction’ has been given by long position holders of such contracts for not doing so. The ITM option contract holders and the CTM option series holders, who have exercised their options by giving explicit instruction, shallreceive the difference between the Settlement Price and Strike Price in Cash as per the settlement schedule. In the event contrary instruction is given by ITM option position holders (other than those belonging to CTM option series), the positions shall expireworthless.All CTM positions which are not exercised shall also expire worthless. All Out of the money (OTM) option contracts, except those belonging to ‘CTM’ option series, shall expire worthless.
In the event the OTM position holders, which are in CTM option series,exercise their option positions, shall be required to pay and settle the difference between strike price and settlement price as per thesettlement schedule. All devolved futures positions shall be considered to be opened at the strike price of the exercised options. In casethe DSP is exactly midway between two strike prices, then immediate two option series having strike prices just above DSP and immediate two option series having strike prices just below DSP shall be referred as ‘Close to the money’ (CTM) option series.
Due Date Rate:Daily settlement price of underlying futures contract on the expiry day of options contract.(Final Settlement Price)