An overview on the Launch of Options trading in Silver by MCX on 24th May 2018.
MCX will launch SILVER (30 KG) OPTIONS today, 24th May2018. Silver is also known as White Gold by many investors. In physical market people call it "Safed Peti". Silver is considered both precious and industrial metal as it is used for ornaments and utensils, trade, and as the base for many monetary systems. In terms of value it is next to gold.
World Physical demand for Silver
The demand for silver is widespread in the global market. The major contribution is in the following categories:
Jewellery – 20%
Coins & Bars – 15%
Silverware – 6%
Industrial fabrication – 59%
What are the characteristics of Silver Market?
Silver is a valuable portfolio diversifier
Today, silver is sought as a valuable and useful industrial commodity and as an investment.
Silver can be classified as both a precious metal and an industrial metal.
Basic information of MCX Silver options:
Lot size: 30 Kg.
Profit/Loss per 1 Rupee= Rs. 30. (Similar to Silver regular future).
Tick size: 0.50 paise.
Tick value: Rs. 15.
Expiry date: 27th June 18. (3 working days before 1st tender day of future contract).
Bi-Monthly Expiry similar to future.
Advantages of Options trading in Silver
The Advantages of Silver trading as predicted by Mr.Ponmudi, Managing Director of Enrich Commodities & Market Analyst are as follows:
The involvement of hedging strategy among the market participants would prove to be higher.
The number of market participants trading in Silver Options would increase radically.
Good volume of trading can be expected in Options Silver trading.
Upside and downside trading would be beneficial.
The drive for trading in Options Silver trading would increase for those trading in equity segment.
This would be a healthy move for the trading industry.
The volatility is likely to be higher than options trading in Crude & Copper.
For trading in Silver futures, full span margin is required, whereas for trading in Silver options, the premium amount is sufficient.
Higher returns can be expected with lower investment.
Limited risk = Unlimited profit
Hedging strategy will be on raise as it can be used to minimise risk in options trading.
CTT charges will be lower in options trading with a premium of 0.05% value
Special offer by MCX till September 2018:
No transaction charges
Factors that influence the price movement
Global news flow
Economic updates from U.S. , Europe and China
Movement in dollar index
FEATURES OF MCX SILVER OPTIONS CONTRACT WITH SILVER (30KG) FUTURES AS UNDERLYING
Underlying: Underlying shall be Silver Futures contract traded on MCX
Expiry Day (Last Trading Day): Three business days prior to the first business day of Tender Period of the underlying futures contract.
Trading Period: Monday through Friday (10.00 a.m. to 11.30 / 11.55 p.m.# ) | Trading Unit: One MCX Silver futures contract
Underlying Price Quote: Ex-Ahmedabad (inclusive of all taxes and levies relating to import duty, customs but excluding sales tax and VAT, any other additional tax or surcharge on sales tax, local taxes and octroi or GST as applicable)
Strikes: 10 In-the-money, 10 Out-of-the-money and 1 Near-the-money. (21 CE and 21 PE). The Exchange, at its discretion, may enable additional strikes intraday, if required.
Strike Price Intervals: `250
Daily Price Limit:The upper and lower price band shall be determined based on statistical method using Black76 option pricing model and relaxed considering the movement in the underlying futures contract. In the event of freezing of price ranges even without a corresponding price relaxation in underlying futures, if deemed necessary, considering the volatility and other factors in the option contract, the Daily Price 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 margining system. 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%
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
Premium: Premium of buyer shall be blocked upfront on real time basis.
Margining at client level: Initial Margins shall be computed at the level of portfolio of individual clients comprising of the positions in futures and options contracts on each commodity
Mark to Market: The option positions shall be marked to market by deducting / adding the current market value of options positions (positive for long options 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 individual client: 200 MT for all Silver Options contracts combined together or 5% of the market wide open position whichever is higher, for all Silver Options contracts combined together.
For a member collectively for all clients: 2000 MT for all Silver Options contracts combined together or 20% of the market wide open position whichever is higher, for all Silver Options contracts combined together.
Upon expiry of the options contract, after devolvement of options position into corresponding futures positions, open positions may exceed their permissible position limits applicable for future contracts. Such excess positions shall have to be reduced to the permissible position 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 by the long position holders of such contracts.
All In the money (ITM) option contracts, except those belonging to ‘CTM’ option series, shall be 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 instructions shall, receive the difference between the Settlement Price and Strike Price in Cash as per the settlement schedule.
In the event contrary instructions are given by ITM option position holders (other than those belonging to CTM option series), the positions shall expire worthless. All CTM positions which are not exercise 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 the settlement schedule.
All devolved futures position shall be considered to be opened at the strike price of the exercise options.
In case the 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