Commodity

Derivatives
Why Commodity Derivatives?

Commodities are traded as Futures and Used mainly for Trading, Hedging and
Options Arbitrage

Hedgers
Arbitragers
Traders • Exporters & Importers
• Brokerage Houses
• Retail & HNI Investors • Refineries & Manufacturing
• Proprietary Traders
• Institutional Traders • Processing Companies
• Investors
• Farmers & Producers

2
Commodities: A History

• The modern trade in Commodity Futures could trace its origin back to the 17th century in
Osaka, Japan. Organized trading on an exchange started in 1848 with the establishment of
the Chicago Board of Trade (CBOT)

• Organized commodity derivatives in India can be traced back to 1875 with the Bombay
Cotton Trade Association’s future trading. Over time the derivatives market developed in
several other commodities in India. Following Cotton, derivatives trading started in Oil seeds
in Bombay (1900), Raw Jute in Calcutta (1912), Wheat in Hapur (1913) and Bullion in
Bombay (1920) but it was discontinued in the mid 1960‘s due to war, natural calamities and
the consequent shortages.

• In 2002, the government allowed the reintroduction of commodity futures on nationwide

screen based exchanges. After merging FMC with SEBI in Sept 2015, SEBI took various
actions like introduction of Commodity Options, Negotiable Warehouse Receipts (eNWR)
and Index Based Contracts. Recently SEBI has also permitted many new participants like
Mutual Funds (MF), PMS, Eligible Foreign Entities (EFE), Alternative Investment Funds (AIF)
Category – III and stock exchanges NSE & BSE in Commodity.

3
 Global Exchanges and Major Commodities Traded

NYMEX COMEX CBOT LME ICE BMD

Crude
Crude Oil Gold Soybean Copper Cotton
Palm Oil

Natural Soybean
Silver Lead Sugar
Gas Oil

Heating Soybean Brent

Platinum Zinc
Oil Meal Crude

Palladium Wheat Nickel

Corn Aluminum

4
 Commodity Exchanges in India and Major Contracts Traded

Hard Soft
Commodities Commodities
BASE METALS AGRI
Multi Commodity National Commodity
• Aluminum, Copper, Lead, Nickel, • Cotton, Crude Palm Oil,
Exchange - 2003 and Derivatives
Exchange - 2003 Zinc Mentha Oil, Kapas, Black
• Steel Pepper, Rubber
BULLION • Barley, Channa, Wheat,
Turmeric, Jeera, Coriander,
• Gold, Gold Mini, Gold Guinea, Gold Moong, Cardamom, Mustard
Petal, Silver, Silver Mini, Silver Micro Seed, Cotton Seed Oilcake,
• Diamond Castor Seed, CPO, Guar Seed,
Guar Gum, Soy Bean, Refined
ENERGY Soy Oil, Paddy (Basmati)
Bombay Stock Exchange National Stock
– 2018 Exchange – 2018 • Crude Oil, Natural Gas

5
Factors affecting Commodity Prices

Primary Factors

• Production, Inventories, Demand & Supply, Seasonality

• Government Policies, Tariff, Import Duties and Other Taxes
• Geo-Political Concerns
• Imports & Exports
• Global Economic Growth
• Weather Situation

Other Factors

• Currency, Inflation and Interest Rates

• Costs involved in Storage and Transportation
• Regulatory changes
• Extra-ordinary events

6
 0
2,000
4,000
8,000
10,000
12,000
16,000
18,000
20,000

14,000

6,000
Jul 17, 2022
May 15, 2022
Mar 13, 2022
Jan 09, 2022
Nov 07, 2021
Sep 05, 2021
Jul 04, 2021
May 02, 2021
Feb 28, 2021
Dec 27, 2020
Oct 25, 2020
Aug 23, 2020
Jun 21, 2020
Apr 19, 2020

NIFTY
Feb 16, 2020
Dec 15, 2019
Oct 13, 2019
Aug 11, 2019
Jun 09, 2019
Apr 07, 2019
Feb 03, 2019

MCX ICOMDEX
Dec 02, 2018
Sep 30, 2018
MCX ICOMDEX vs. NIFTY

Jul 29, 2018

May 27, 2018
Mar 25, 2018
Jan 21, 2018
Correlation with NIFTY

Nov 19, 2017

a financial asset that maintains its value and

Sep 17, 2017

purchasing power during inflationary periods.

As an investment vehicle, gold is typically viewed as Jul 16, 2017
May 14, 2017
0.00
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
14,000.00
16,000.00

0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000

Jul 17, 2022

May 15, 2022
Mar 13, 2022
Jan 09, 2022
Nov 07, 2021
Sep 05, 2021
Jul 04, 2021
May 02, 2021
Feb 28, 2021
Dec 27, 2020
Oct 25, 2020
Aug 23, 2020
Jun 21, 2020
Apr 19, 2020
Feb 16, 2020
Dec 15, 2019
NIFTY

Oct 13, 2019

Aug 11, 2019
Jun 09, 2019
Apr 07, 2019
Gold
Gold vs. NIFTY

Feb 03, 2019

Dec 02, 2018
Sep 30, 2018
Jul 29, 2018
May 27, 2018
Mar 25, 2018
Jan 21, 2018
Nov 19, 2017
Sep 17, 2017
Jul 16, 2017
7

May 14, 2017

geopolitical risks. When geopolitical or economic risks
suddenly rise, Commodity prices go up and equity falls

0.00
Commodities are price sensitive to economic instability and

500.00
1,000.00
1,500.00
2,000.00
2,500.00
Commodity Contract
Specifications

8
Commodity Futures
UNDERLYING GOLD GOLD MINI GOLD GUINEA GOLD PETAL SILVER SILVER MINI SILVER MICRO

EXPIRY DAY 5th Day of the Month Last Calendar Day 5th Day of the Month Last Calendar Day

TRADING UNIT 1 kg 100 grams 8 grams 1 gram 30 kg 5 kg 1 kg

PRICE QUOTE UNIT 10 grams 8 grams 1 gram 1 kg

TICK SIZE Rs.1/- per Quote Unit

Rs. CHANGE PER 1
100 10 1 30 5 1
RUPEE MOVEMENT

UNDERLYING CRUDE OIL NATURAL GAS ALUMINUM LEAD ZINC COPPER NICKEL

EXPIRY DAY As per the Contract Launch Calendar Last Calendar Day

TRADING UNIT 100 barrels 1250 mmBtu 5 MT 2500 kg 1500 kg

PRICE QUOTE UNIT 1 barrel 1 mmBtu 1 kg

TICK SIZE Rs.1 0.1 Rupee 0.05 Rupee 0.1 Rupee

Rs. CHANGE PER 1

100 1250 5000 2500 1500
RUPEE MOVEMENT
9
MCX Commodity Indices
• MCX offers trading in BULLDEX,
METLDEX and ENRGDEX Futures
Represents
Avoids single
• BULLDEX is a sectoral index based real-time
Commodity
Commodity
on the Gold 1Kg (63.70%) and Future prices
Risk
Silver 30 Kg (36.30%) Futures
Ease of Sectoral
• METLDEX is based on Base Metal trading Benchmark
Futures i.e. Aluminium (16.12%),
Copper (39.74%), Lead (4.59%),
Nickel (25.21%) and Zinc (14.34%)
Why trade
Portfolio Cash-settled
• ENRGDEX is based on the Crude Diversification Commodity Contracts
Oil (51.07%) and Natural Gas Indices?
(48.93%) Futures

• Weights are rebalanced annually,

during January Roll period
*next rebalancing on 24, 19 & 10 Jan 2023 for
BULLDEX, METLDEX and ENRGDEX respectively
10
Index Futures

MCXBULLDEX

UNDERLYING MCX iCOMDEX BULLION (Gold – 63.70% & Silver – 36.30%)

1 day prior to start of tender period of underlying constituent in Index (or) 25th
EXPIRY DAY
working day of month

TRADING UNIT 50 units of Bullion Index

PRICE QUOTE UNIT Index points

TICK SIZE 1

Rs. CHANGE PER 1

Rs.50
RUPEE MOVEMENT

SETTLEMENT
Cash Settled
MECHANISM

11
 Options on Commodity Futures
UNDERLYING GOLD (1 KG) AND SILVER (30 KG) AND CRUDE OIL NATURAL GAS COPPER ZINC NICKEL
FUTURES GOLD MINI (100 GRMS) SILVER MINI (5 KG) (100 BARRELS) (1250 MMBTU) (2.5 MT) (5 MT) (1.5 MT)

3 business days prior to the first 3 business days prior to the first
2 business days prior to Expiry of the
EXPIRY DAY business day of Tender Period of business day of Tender Period of
underlying
underlying underlying

PRICE QUOTE Ex-Ahmedabad (incl. taxes & levies relating to Ex-Warehouse Thane district (excl. only
Ex-Mumbai (excl. all taxes & levies)
(UNDERLYING) import duty, customs but excl. other taxes) GST)

EXERCISE
European Style options
STYLE
• 25 each for ITM & OTM • 15 each for ITM & OTM • 7 each for ITM & OTM
STRIKE PRICE
• 1 for ATM • 1 for ATM • 1 for ATM
STRIKE
100 250 50 5 5 2.50 20
INTERVAL (RS.)
TICK SIZE 0.50 0.5 0.1 0.05 0.01 0.01 0.05

DAILY • Options Premium settlement on T+1 day basis

SETTLEMENT • MTM on Options positions to be adjusted with margin requirement. MTM gains and losses would not be settled in cash

On exercise, Options positions devolve into underlying Futures position (open at the strike price)
SETTLEMENT • long call position & short put position devolve into long position in the underlying futures contract
• long put position & short call position devolve into short position in the underlying futures contract 12
Understanding
Commodity Options

13
What is a Commodity Option?

An Option is a contract that gives the right, The party taking Long position i.e.,
but not the obligation, to buy or sell the buying the option is called
underlying asset on or before a stated Buyer/Holder of the option and the
date/day, at a stated price, for a price. In party taking Short position i.e., selling
commodity options, as the name suggests, the option is called the Seller/Writer of
the underlying asset will be a commodity. the option.

Call Option gives the buyer the right but not an obligation to buy the underlying asset

Put Option gives buyer the right but not an obligation to sell the underlying asset

14
Why Commodity Options?

Options offer the buyer an Insurance against adverse

movement, but allow for participation on favorable side

Maximum Loss to the extent of Premium paid for Buyer Buyer Seller

Premium
Exchange Traded options free from counter party risk

Right
Futures & Options combination (both risk management tools):
gives leverage of futures with safety of options: Profit from
change in future prices but limit losses via Options
Participants can devise hundreds of effective hedging
strategies

Better Cash-flow management, one-time payment of Premium

Low Transaction Cost, less capital intensive

15
Terminology

Option Price/Premium • Price, which the option buyer pays to the option seller

Strike Price/ Exercise Price • Price at which the underlying asset will be purchased or sold by the option holder on
exercise of option

Exercise of Options • Buying/selling of the underlying. All these options are exercised with respect to the
settlement price/closing price of the underlying on the day of exercise of option

Tenor of Option • Life of an option contract

Lot Size • Number of units of underlying in an option contract

Spot Price • It is the price of the underlying asset at any point of time in the market

Open Interest • Open interest is the total number of option contracts outstanding for an underlying asset

Futures • Future contracts obligate parties to buy/sell the underlying at a predetermined future date
and price. Underlying can include physical commodities or financial instruments

16
Moneyness of an Option
“Moneyness” is an indicator of whether an option (call or put) would make money if it is exercised immediately

Call Option Put Option

In the money (ITM) Option Spot price > Strike price Spot price < Strike price
• Gives positive cash flow if exercised immediately
• Automatically exercised unless buyer instructs otherwise

At the money (ATM) Option Spot price = Strike price Spot price = Strike price
• Gives zero cash flow if exercised immediately
• Not exercised unless instructed by buyer

Close to the money (CTM) Option two*/three** option series above and below ATM option
• Gives positive to negative cash flow depending on its position from ATM
• Only positive cash flow exercised

Out of the money (OTM) Option Spot price < Strike price Spot price > Strike price
• Gives negative cash flow if exercised immediately
• Automatically lapses

*in case of “Options on Futures” **in case of “Options on Goods” 17

Understanding Commodity Options
Options on Goods
• As the name suggests, the underlying in Options on Goods contracts are goods/commodities
• Physical delivery of underlying good on contract expiry is exercised as per ITM/ATM/OTM classification

Options on Futures
• As the name suggests, the underlying in Options on Futures are Futures contracts
• Devolvement into underlying future contract on option expiry as per following conditions
Moneyness
of Option

process
Devolvement
1. ITM  delivery is automatically
exercised unless buyer instructs otherwise 1. Long Call  Long Future
2. ATM  delivery is not exercised unless 2. Long Put  Short Future
instructed by buyer
3. Short Call  Short Future
3. OTM  contract automatically lapses
4. Short Put  Long Future
(Note that Crude oil and Natural gas contracts are
only cash settled)

Note: Currently all MCX commodity options contracts being traded are options on futures 18
 Factors
influencing
Option Price

19
 Options on Commodity Futures
GOLD (1 KG) AND
UNDERLYING SILVER (30 KG) AND CRUDE OIL NATURAL GAS COPPER ZINC NICKEL
GOLD MINI (100
FUTURES SILVER MINI (5 KG) (100 BARRELS) (1250 MMBTU) (2.5 MT) (5 MT) (1.5 MT)
GRMS)

3 business days prior to the first

3 business days prior to the first business day
EXPIRY DAY 2 business days prior to Expiry of the underlying business day of Tender Period of
of Tender Period of underlying
underlying

PRICE QUOTE Ex-Ahmedabad (incl. taxes & levies relating to Ex-Warehouse Thane district (excl. only
Ex-Mumbai (excl. all taxes & levies)
(UNDERLYING) import duty, customs but excl. other taxes) GST)

EXERCISE
European Style options
STYLE
• 25 each for ITM & OTM • 15 each for ITM & OTM • 7 each for ITM & OTM
STRIKE PRICE
• 1 for ATM • 1 for ATM • 1 for ATM

STRIKE
100 250 50 5 5 2.50 20
INTERVAL (RS.)

TICK SIZE 0.50 0.5 0.1 0.05 0.01 0.01 0.05

DAILY • Options Premium settlement on T+1 day basis

SETTLEMENT • MTM on Options positions to be adjusted with margin requirement. MTM gains and losses would not be settled in cash

On exercise, Options positions devolve into underlying Futures position (open at the strike price)
SETTLEMENT • long call position & short put position devolve into long position in the underlying futures contract
• long put position & short call position devolve into short position in the underlying futures contract
20
End of Settlement (EOS)
Illustration

21
End of Settlement (EOS) Illustration
Gold Contract Calendar – Month 1 Gold Contract Calendar – Month 2

Sun Mon Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat
1 2
1 2 3 4
3 4 5 6 7 8 9
5 6 7 8 9 10 11
10 11 12 13 14 15 16
12 13 14 15 16 17 18
17 18 19 20 21 22 23
19 20 21 22 23 24 25 24 25 26 27 28 29 30
26 27 28 29 30 31

Legend: 5th day of the month is the expiry date for any Gold Future contract:
• Last 5 working days of the Futures contract till expiry is the Tender Period,
Tender Period where physical delivery of the underlying is exercised i.e. from 29th to 5th of
next month
Future holding Period
• Option contract expires 3 days prior to the first working day of tender period
Devolvement Margin Paid i.e. on 24th
• At I-Sec End of Settlement (EOS) of Option contract takes place on the day of
Future Expiry Date expiry of Options contract (E day) i.e. on 24th around 4:30 PM, while
Option Expiry Date Devolvement Margins – 25% and 50% of underlying Future’s Margin on E-1
EOS date and E day respectively – shall be applicable on the last 2 days of Options
22
contract.
Let’s consider a Crude Oil Option on Futures Contract
EXPIRY DAY 2 business days prior to the Expiry day of the underlying Future contract

UNDERLYING QUOTATION/
Rs. / Barrel
BASE VALUE

EXERCISE STYLE European Style options

STRIKE PRICE 15 each for ITM & OTM & 1 for ATM

STRIKE INTERVAL Rs. 50

TICK SIZE Rs. 0.1

• Options Premium settlement on T+1 day basis

DAILY SETTLEMENT • MTM on Options positions to be adjusted with margin requirement. MTM gains and losses would not be
settled in cash

On exercise, Options positions devolve into underlying Futures position (open at the strike price)
SETTLEMENT • long call position & short put position devolve into long position in the underlying futures contract
• long put position & short call position devolve into short position in the underlying futures contract
23
Crude Oil End of Settlement (EOS) Example
EOS process

Sun Mon Tue Wed Thu Fri Sat Legend

Option Expiry Date
1 2
Future Expiry Date
3 4 5 6 7 8 9
Future holding Period
10 11 12 13 14 15 16
Devolvement Margin Paid
17 18 19 20 21 22 23
EOS date
24 25 26 27 28 29 30
31

• Crude Oil Option contract expires 2 days prior to the expiry of the
underlying Future contract i.e. on 15th
• On the day of expiry of Option contract i.e. on 15th, I-Sec executes End of
Settlement (EOS) of Options contract around 4:30 PM after collecting
Devolvement Margin on the last 2 days (25% on 14th and 50% on 15th).

24
Equity Derivatives vs. Commodity Derivatives
Equity Derivatives

Commodity Derivatives
1. Hundreds of Scrips 1. Limited number of Commodities

2. Contract value between Rs. 5 lakh and 10 2. Contract value between Rs. 5000 and 50

lakh lakh

3. Higher Initial Margin (15% - 50%) 3. Lower Initial Margin (6% - 20%)

4. Market Timings till 3:30 PM 4. Market Timings till 11:30 PM / 11:55 PM

5. High Volatility 5. High Volatility provides opportunity

6. Contracts available up to 3 months only 6. Contracts available up to 12 months

7. Multiple factors impacting scrips 7. Directly connected to International Market

8. STT and Stamp Duty - 0.01% & 0.002% 8. CTT and Stamp Duty - 0.01% & 0.002%*

*detailed explanation in Slide - Brokerage & Charges 25

Brokerage and Taxes

26
 Brokerage and Taxes
Brokerage @ Rs. 20 per order only

Commodity Futures Commodity Options

0.01% on Future Sell turnover (₹ 1000 per crore) Commodity Transaction Tax 0.05% (₹ 5000 per crore) on Premium
(CTT)

SEBI turnover charges at 0.0001% (₹ 10 per SEBI turnover charges at 0.0001% (₹ 10 per
crore) for Non Agri commodities and 0.00001% SEBI Charges crore) on Premium
(₹ 1 per crore) for Agri commodities

Stamp Duty
0.002% on Buy Side (₹ 200 per crore) 0.003% on Buy Side (₹ 300 per crore) on
Premium
MCX Transaction Charges
0.0026% (₹ 260 per crore) 0.05% (₹ 5000 per crore) on Premium

Goods & Services Tax

18% on Brokerage and other Charges 18% on Brokerage and other Charges
(GST)

 Regulatory cost of transacting in Options is very minimal as compared to Futures

27
 Commodity Futures Break-Even Price (BEP) Analysis
Gold Crude Natural
Particulars Gold Silver Copper
Mini Oil Gas
Number of Lots 1 1 1 1 1 1
Buy Price 50,000 50,000 70,000 5,000 200 700
Sell Price 50,100 50,100 70,100 5,050 205 705
Buy Side Brokerage 20 20 20 20 20 20
Sell Side Brokerage 20 20 20 20 20 20
Total Brokerage 40 40 40 40 40 40
Exchange Transaction Charges (Both Sides) 0.0026% 260 26 109 26 13 98
SEBI Charges (Both Sides) 0.0001% 10 1 4 1 1 4
GST on Brokerage and Other Charges 18% 56 12 28 12 10 25.52
CTT (Sell Side) 0.01% 501 50 210 51 26 189
Stamp Duty (Buy Side) 0.002% 100 10 42 10 5 38
Total Expense (Including Brokerage) 967 139 433 140 94 394
Break Even Price 50,010 50,014 70,014 5,001 201 753
BEP in % 0.02% 0.03% 0.02% 0.03% 0.38% 0.42%
Net Profit/Loss 9033 861 2567 4860 6156 19031
28
 Disclaimer
• ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. -
ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400
025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock
Exchange of India Ltd (Member Code: 07730), BSE Ltd (Member Code: 103)
and Member of Multi Commodity Exchange of India Ltd.(Member
Code: 56250) and having SEBI registration no. INZ000183631. Name of the
Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-
40701022, E-mail address: complianceofficer@icicisecurities.com.
Investments in securities market are subject to market risks, read all the

Thank you
related documents carefully before investing. The contents herein above shall
not be considered as an invitation or persuasion to trade or invest. I-Sec and
affiliates accept no liabilities for any loss or damage of any kind arising out of
any actions taken in reliance thereon. Please note Brokerage would not
exceed the SEBI prescribed limit. Such representations are not indicative of
future results. The securities quoted are exemplary and are not
recommendatory. The information mentioned herein above is only for
consumption by the client and such material should not be redistributed.

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29