Commodity Options on MCX: How They Work

The Basics: What Is a Commodity Option?

An option is a contract between two parties - a buyer and a seller - where the buyer acquires a right and the seller assumes an obligation. There are two fundamental types: a call option and a put option. A call option gives the buyer the right to buy the underlying asset at a fixed price (the strike price) on or before a specified date (the expiry). A put option gives the buyer the right to sell the underlying asset at the strike price on or before expiry. In both cases, the buyer pays a one-time upfront cost called the premium. The seller - also called the writer - collects this premium and must fulfil the contract if the buyer chooses to exercise.

On MCX, commodity options are specifically options on futures contracts. This means the underlying asset is not the physical commodity itself but the relevant MCX futures contract. For example, a Gold Options contract on MCX has the Gold Futures contract as its underlying. When a buyer exercises a Gold call option, they do not receive bars of gold; they receive a long position in the Gold Futures contract at the strike price. This structure keeps the settlement manageable and aligns options pricing directly with the futures market, which is where price discovery actually happens in Indian commodity markets.

The concept of the strike price is central. MCX lists multiple strike prices around the prevailing futures price for each commodity option series. These strikes are spaced at fixed intervals - for gold, this might be every ₹100 or ₹200 per 10 grams; for crude oil, every ₹50 per barrel. An option whose strike price is equal to the current futures price is said to be at-the-money (ATM). If a call option has a strike below the current futures price, it is in-the-money (ITM) - exercising it would immediately generate a profit. If the strike is above the futures price, the call is out-of-the-money (OTM). For put options, the logic is reversed: a put is ITM when its strike is above the current futures price.

Expiry is another critical concept. MCX commodity options currently follow an expiry cycle aligned with the corresponding futures contract. On expiry, an ITM option is automatically exercised and converted into a futures position; an OTM option expires worthless and the buyer loses the premium paid. The seller of an OTM option keeps the entire premium as profit. This automatic exercise on expiry is an important feature to understand - unlike some equity options structures, you do not always need to actively instruct exercise.

Style of exercise matters too. MCX commodity options are European-style options, meaning the buyer can only exercise the option on the expiry date, not before. This is in contrast to American-style options, which can be exercised at any time up to expiry. However, European-style options can still be bought and sold freely in the secondary market before expiry - the restriction applies only to exercise, not to trading. This means a call buyer who sees the commodity price move favourably can simply sell the option in the market before expiry and book the profit without going through the exercise-to-futures process.

MCX: India's Primary Commodity Options Marketplace

The Multi Commodity Exchange of India, known as MCX, was established in 2003 and has grown into one of Asia's most active commodity exchanges. It operates under the regulatory oversight of SEBI, which took over commodity derivatives regulation from the erstwhile Forward Markets Commission (FMC) in 2015. MCX provides an electronic, transparent trading platform for a wide range of commodity futures and options contracts.

MCX introduced commodity options trading in October 2017 with Gold Options, making India one of the few emerging markets to offer exchange-traded commodity options to retail participants. The exchange subsequently launched options on other commodities, including Silver, Crude Oil, Copper, Zinc, Lead, Aluminium, and Natural Gas. Each launch followed regulatory approval from SEBI and required MCX to demonstrate sufficient liquidity and warehousing infrastructure for the underlying futures contracts.

The commodities currently available for options trading on MCX span several sectors. Precious metals - gold and silver - attract significant participation from jewellers, importers, and retail investors who use the options market for price-risk management. Energy commodities like crude oil and natural gas draw participation from refiners, distributors, and traders who are exposed to global energy price swings. Base metals such as copper, zinc, lead, and aluminium are traded by manufacturing companies, importers, and speculators tracking global supply-demand dynamics.

Trading hours on MCX extend from 9:00 AM to 11:30 PM IST on weekdays (and 9:00 AM to 11:55 PM IST on certain days), which is notably longer than equity market hours. This extended window allows MCX to capture price moves during US and European market sessions, which are highly relevant for internationally priced commodities like crude oil and gold. Option traders must be aware that significant price moves can occur in the evening session, especially when the US Energy Information Administration (EIA) releases weekly inventory data or when geopolitical events unfold overseas.

Contract specifications differ by commodity. Gold Options on MCX are based on the Gold (1 kg) Futures contract, with a lot size of 1 kg of gold (995 purity). Silver Options are based on the Silver (30 kg) Futures contract. Crude Oil Options are based on the Crude Oil Futures contract with a lot size of 100 barrels. These lot sizes determine the notional value of each contract and, importantly, the monetary impact of each rupee move in the premium or the underlying.

Settlement currency is the Indian Rupee, and all prices on MCX reflect domestic rates - which means the impact of the INR/USD exchange rate is embedded in domestic commodity prices for internationally priced commodities. A rise in the dollar or a fall in the rupee tends to push up domestic gold, crude oil, and copper prices even if international prices are flat. This currency dimension adds another layer of complexity and opportunity for commodity option traders.

SEBI continuously updates regulations around commodity derivatives. Margin requirements, position limits, and eligible participants are all subject to revision. Traders are strongly advised to check the latest MCX circulars and SEBI notifications before initiating positions.

Options Pricing: The Premium and Its Components

The premium - the price of an option - is not arbitrary. It has a logical structure, and understanding that structure helps you evaluate whether an option is expensive or cheap relative to historical norms. Premium is composed of two parts: intrinsic value and time value.

Intrinsic value is the amount by which an option is in-the-money. For a call option on Gold Futures with a strike of ₹60,000 per 10 grams, if the current futures price is ₹62,000, the intrinsic value is ₹2,000. The option is worth at least that much because immediate exercise would generate a ₹2,000 gain per 10 grams. An OTM option has zero intrinsic value - its strike is not favourable relative to the current price.

Time value is everything above intrinsic value. It reflects the possibility that the option could move further in-the-money before expiry. An ATM option has zero intrinsic value but significant time value, because there is an equal chance the price could move in either direction and make the option valuable. Time value decays as expiry approaches - this decay accelerates dramatically in the last few weeks of an option's life. The daily erosion of time value is called theta decay, and it is one of the most important concepts for option buyers to internalise: every day you hold an option, a slice of its value evaporates simply due to the passage of time, all else equal.

Beyond intrinsic and time value, four primary factors drive premium levels. The first is the current price of the underlying futures contract relative to the strike price - the moneyness of the option. The second is time to expiry: the more time remaining, the higher the premium. The third is implied volatility (IV). Volatility is the market's expectation of how much the underlying price will move over the option's remaining life. When volatility is high - say, ahead of a major US Federal Reserve announcement or a geopolitical crisis - option premiums rise because there is a greater chance that the underlying will move far enough to make the option profitable. When volatility falls, premiums compress. Implied volatility is derived from market prices using an options pricing model, most commonly the Black-Scholes-Merton model or its futures variant, the Black-76 model, which is more appropriate for commodity options since the underlying is a futures price.

The fourth factor is the risk-free interest rate, though its impact on commodity options is smaller than the other three in most practical scenarios.

Market participants track something called the "Greeks" - mathematical measures of how an option's price changes with each input. Delta measures sensitivity to a ₹1 change in the futures price. Gamma measures how fast delta itself changes. Theta is the daily time decay in rupee terms. Vega measures sensitivity to a 1% change in implied volatility. Rho measures sensitivity to interest rate changes. For commodity option traders, delta, theta, and vega tend to be the most practically relevant Greeks. A deep ITM option has a delta close to 1, behaving almost like a futures position. An ATM option has a delta near 0.5. An OTM option has a lower delta but higher leverage relative to the premium paid.

Implied volatility in commodity markets can be highly situational. Gold IV tends to spike during global financial stress or currency crises. Crude oil IV spikes around OPEC meetings, US inventory data releases, or Middle East geopolitical events. Natural gas IV surges ahead of winter demand season or unexpected weather events. Traders who understand the typical IV cycle for each commodity - when it is historically cheap versus expensive - can make more informed decisions about buying or selling options.

Types of Participants and Why They Use Commodity Options

Commodity options attract a diverse set of participants, each with a different objective. Understanding why different players enter the market helps you appreciate the mechanics of pricing and liquidity.

Hedgers are the original reason options markets exist. A hedger has a natural exposure to a commodity price and uses options to reduce that risk. Consider a large jewellery manufacturer who needs to purchase 10 kg of gold three months from now. If gold prices rise sharply before the purchase, input costs balloon and margins are squeezed. The jeweller can buy call options on MCX gold futures to cap the effective purchase price. If gold rises, the call option gains value, offsetting the higher purchase cost. If gold falls, the jeweller simply does not exercise the option, lets it expire, and buys gold at the now-lower market price. The premium paid is the cost of this insurance.

On the other side, a mining company or bullion trader holding physical gold inventory fears a price decline. A put option hedges this risk - if prices fall, the put gains value. The beauty of options versus futures for hedgers is that options allow participation in favourable price moves. A futures hedge locks in a price in both directions; if you hedge a short physical position with a long futures position and prices fall, you gain on futures but lose on the physical - net effect is flat. With a put option, if prices fall you gain on the put; if prices rise, you simply don't exercise and benefit from the higher price on your physical inventory.

Speculators use options to take directional or volatility views with defined risk. An options buyer's maximum loss is capped at the premium paid. A trader who believes crude oil will rally sharply in the next four weeks due to an expected OPEC production cut can buy a call option. If the rally materialises, profits can be many multiples of the premium paid. If the view is wrong and crude falls or stays flat, the maximum loss is just the premium - not the potentially unlimited loss of a naked short futures position.

Option writers, or sellers, take the opposite side. They collect the premium and hope the option expires worthless. Writing options can be profitable when implied volatility is high (premiums are rich) and the underlying does not make the expected large move. However, option selling carries significant risk: a naked call writer on crude oil faces unlimited loss if prices surge dramatically. Writing is generally considered an activity suited to experienced traders with adequate capital and strong risk management.

Arbitrageurs and market makers play a role in keeping prices fair and efficient. They simultaneously trade options and their underlying futures to capture pricing anomalies and provide liquidity. While retail traders rarely do this directly, their activity benefits everyone by tightening bid-ask spreads.

In India, agricultural commodity options are also available on NCDEX - the National Commodity and Derivatives Exchange - which focuses on farm produce like guar, soybean, chana, and castor seed. NCDEX options serve a critical purpose for farmers and agri-commodity traders who want to protect themselves against price risk without the obligation that comes with futures contracts. This further illustrates that commodity options are not just financial trading instruments - they serve genuine economic hedging purposes across the Indian supply chain.

Margin Requirements and Capital Efficiency

One of the most practically important distinctions between buying and selling options lies in the margin framework. For option buyers, the risk is limited to the premium paid. When you buy a call or put option on MCX, you pay the premium upfront and that is the maximum you can lose. No additional margin is collected by MCX from option buyers beyond the premium (there are some adjustments for extreme market scenarios, but for standard conditions, premium is the cost). This makes buying options one of the most capital-efficient ways to gain commodity exposure with defined risk.

Option sellers (writers) face a very different margin regime. Because the writer has potentially unlimited liability - particularly for naked call writers - MCX collects SPAN (Standard Portfolio Analysis of Risk) margin plus an Exposure Margin from writers. SPAN margin is a risk-based margin system that uses portfolio simulation to estimate the worst-case loss over a specified time horizon. The exact margin rates are notified by MCX and updated periodically; they can be substantial, often amounting to 5–15% or more of the notional contract value for a single-leg short option position. For example, writing one lot of Crude Oil options (100 barrels) when crude is at ₹6,500 per barrel represents a notional value of ₹6,50,000 - margin could be ₹40,000–₹80,000 or more, depending on current SEBI/MCX margin norms.

When options are part of a spread strategy - where you buy one option and sell another simultaneously - margin requirements can be lower because the risk of the short option is partially offset by the long option. For example, in a bull call spread (buying a lower strike call and selling a higher strike call), the maximum loss is limited to the net premium paid, and MCX calculates margin accordingly, providing capital relief versus a naked short.

Mark-to-market (MTM) settlement is another feature to understand. While option buyers do not face daily MTM margin calls (their loss is already capped by the premium paid), option sellers do face daily MTM settlement. If the market moves against the seller and the option's value rises, the seller's account is debited on a daily basis to reflect the paper loss. This requires sellers to maintain sufficient cash or liquid collateral in their account at all times.

The concept of assignment risk is relevant for option sellers in the context of automatic exercise on expiry. When an ITM option expires, MCX automatically exercises it and assigns a futures position to the seller. If you have written a Gold call option and it expires ITM, you will be assigned a short futures position in Gold at the strike price, while the buyer will be assigned a long futures position. Post-exercise, these futures positions are subject to futures margin requirements and normal futures settlement rules. Sellers must have this in mind when managing positions close to expiry.

For retail participants, the takeaway is clear: buying options offers limited downside and defined capital commitment. Selling options offers premium income but requires significant margin and carries the risk of large losses. The vast majority of retail commodity options participants are buyers, and this is entirely rational given the risk profile.

Key Options Strategies for Commodity Markets

While there are dozens of recognised options strategies, a core set of strategies are both commonly used and pedagogically valuable for understanding how commodity options work. This section covers the most important ones with reference to how they play out in MCX commodity markets.

Buying a Call (Long Call): The simplest bullish strategy. You buy a call option expecting the commodity futures price to rise above the strike before expiry. If you buy a Gold call with a strike of ₹62,000 per 10 grams and pay a premium of ₹500, your breakeven is ₹62,500. If Gold Futures settle above ₹62,500 at expiry, you profit. Below ₹62,000, the option expires worthless and you lose ₹500 per 10 grams - multiplied by the lot size of 1 kg, that is a maximum loss of ₹5,000 (since 1 kg = 100 units of 10 grams, actually for gold the lot size premium works out to ₹500 × 100 ten-gram units, so total premium = ₹50,000; this illustrates why lot size matters enormously).

Buying a Put (Long Put): The simplest bearish strategy. Useful for hedgers with long commodity exposure or speculators expecting a price decline. If crude oil is at ₹6,500 per barrel and you buy a put at ₹6,400 strike for ₹150 premium, you profit if crude falls below ₹6,250 at expiry. Maximum loss is ₹150 per barrel × 100 barrels = ₹15,000.

Covered Call (Writing a Call Against a Long Futures Position): A moderately bullish or neutral strategy. If you are long Gold Futures and believe prices will not rise much, you write a call option to collect premium income. The premium received reduces your effective cost of holding the futures position. If prices rise above the strike, your futures profits are capped, but you retain the premium. This is a common hedging tool for bullion traders with inventory.

Protective Put (Buying a Put Against a Long Futures Position): Essentially insurance for a long commodity position. You hold long Gold Futures and buy a put option to protect against a severe price drop. The put acts as a floor for your position. Cost of protection is the premium paid.

Bull Call Spread: Buy a lower-strike call and simultaneously sell a higher-strike call on the same commodity and expiry. This reduces the net premium paid (compared to buying the call alone) but also caps the maximum profit. Useful when you have a moderately bullish view and want to reduce premium cost. For example, on Silver Futures: buy ₹75,000/kg call at ₹800 premium, sell ₹77,000/kg call at ₹300 premium. Net premium paid: ₹500/kg. Maximum gain: ₹2,000/kg (difference between strikes) minus ₹500 premium = ₹1,500/kg.

Bear Put Spread: Mirror of the bull call spread, using put options for a moderately bearish view. Buy a higher-strike put, sell a lower-strike put. Net premium is reduced, maximum loss is capped.

Straddle: Buy both an ATM call and an ATM put with the same strike and expiry. Profits if the commodity makes a large move in either direction. Useful when you expect high volatility but are uncertain about direction - for example, ahead of a major OPEC announcement or the US Federal Reserve meeting that could sharply impact crude oil or gold. The strategy is expensive because you pay two premiums, and the commodity must move significantly for the position to be profitable.

Strangle: Similar to a straddle but uses OTM options - buy an OTM call and an OTM put. Cheaper than a straddle but requires an even larger move to be profitable.

Each strategy has a specific risk-reward profile. Buyers of options have limited risk and uncapped (or capped, in spreads) reward. Writers of options have capped reward (the premium) and potentially large risk. Spreads sit in between, offering defined risk and defined reward. The choice of strategy should be driven by your market view, risk appetite, capital available, and the current level of implied volatility.

Hedging with Commodity Options: Practical Applications

Hedging is the most economically important use of commodity options, and it is worth exploring in considerable depth because the logic of hedging illuminates why these instruments were created in the first place.

The core principle of a commodity hedge is to take a derivative position that moves in the opposite direction to your natural (physical) commodity exposure. Options are particularly powerful hedging tools because they are asymmetric: they protect against adverse price moves while still allowing the hedger to benefit from favourable ones - at the cost of the premium paid.

A gold jewellery manufacturer represents a classic hedging use case in India. Large jewellers maintain order books months in advance, quoting prices to retail customers. The risk is that gold prices rise sharply between the time an order is booked and the time gold is actually purchased from the bullion market. By buying Gold call options on MCX that expire around the time of the planned purchase, the jeweller effectively caps the purchase price at the strike. If gold rises, the call option profit compensates for the higher purchase cost. If gold falls, the jeweller buys at the lower market price and the call option cost (premium) is the only additional expenditure - a well-defined insurance cost.

An oil marketing company (OMC) or petroleum refiner in India faces the opposite risk: rising crude oil prices increase input costs. Buying crude oil call options on MCX provides protection. The options can be timed to align with the company's procurement cycle. Importantly, because MCX crude oil options are cash-settled against the MCX Crude Oil Futures price (which itself tracks Brent or WTI with some basis), the hedge may not be perfect if the company's actual crude procurement price differs from the MCX futures price. This difference is called basis risk, and it is an important limitation that all hedgers must account for.

Farmers and agri-commodity traders hedge using NCDEX options on crops like guar seed, soybean, or chana. A farmer who has planted soybean and fears price decline can buy put options on NCDEX Soybean Futures to lock in a minimum selling price. This concept - using put options to establish price floors - is essentially what developed-country governments implement through agricultural price support programs, but options allow market participants to do it themselves at market cost.

A copper exporter who has contracts denominated in USD but faces INR costs might buy copper put options to hedge against a fall in copper prices between the production date and the export sale. Similarly, a wire manufacturer who needs to buy copper regularly may use call options to hedge against cost increases.

Dynamic hedging is a more advanced approach where the hedger adjusts the options position as market conditions change. For instance, as a call option moves deep in-the-money, its delta rises toward 1 and it behaves almost like a futures contract. A dynamic hedger may then sell some of the call options and buy futures to maintain a desired risk profile. This requires active monitoring and incurs transaction costs, but can be more capital-efficient for large industrial hedgers.

It is important to note that hedging with options does not eliminate all risk - it transforms and manages risk. The premium paid is a certain cost; the protection is uncertain until expiry. Basis risk (the difference between the MCX futures price and the actual physical price) can reduce hedge effectiveness. And operationally, maintaining margin for written options positions within a spread strategy requires careful cash management. Companies that use MCX options for hedging should have a documented hedging policy and, where relevant, consult qualified commodity risk managers.

Expiry, Settlement, and the Futures Conversion Process

Understanding how MCX commodity options expire and settle is critical to avoiding unexpected outcomes, particularly for retail traders.

MCX commodity options are European-style and expire on a date specified in the contract specifications, which is aligned with - but typically a few days before - the expiry of the corresponding futures contract. For example, Gold Options may expire five business days before the Gold Futures contract expiry. This gap is designed to allow sufficient time for the futures positions created through option exercise to be managed or rolled before the physical delivery window of the futures contract opens.

On the expiry date, the settlement price is determined based on the Daily Settlement Price (DSP) of the underlying futures contract on that day. MCX uses an averaging methodology (often the weighted average of futures prices in the last 30 minutes or similar) to determine the settlement price, reducing the risk of price manipulation at the close.

Options that expire in-the-money are automatically exercised. If you hold a Gold Call Option with a strike of ₹62,000 and the underlying Gold Futures settlement price on expiry is ₹63,500, your call is ₹1,500 in-the-money. MCX automatically exercises it and you receive a long futures position in Gold at ₹62,000. Simultaneously, the futures market price is ₹63,500, so you have an immediate mark-to-market gain of ₹1,500 per 10 grams on the futures position. You can then either hold the futures position, close it immediately, or roll it to the next month.

Options that expire at-the-money or out-of-the-money expire worthless. The buyer loses the entire premium paid. The seller retains the entire premium. No futures position is created.

For option sellers, automatic exercise on ITM options means they must be prepared to receive an adverse futures position at expiry. A Gold Call writer who receives a short futures position when gold has risen sharply must either immediately close that futures position (realising the loss) or hold it - with all the associated futures margin requirements and further directional risk.

Before expiry, options can be traded in the secondary market just like any other exchange-traded instrument. If you are holding a call option that has moved significantly in-the-money and you do not want to go through the futures exercise process, simply sell the option in the market. The proceeds will reflect the option's intrinsic value plus any remaining time value. This is the most common way retail traders exit positions.

Liquidity near expiry deserves a mention. As options approach their last few days, time value erodes rapidly (theta decay accelerates). Bid-ask spreads may widen for deep OTM options as market makers become reluctant to hold inventory in contracts with little remaining value. ATM and near-ATM options tend to maintain reasonable liquidity because their outcome is uncertain until the last moment. Retail traders should be aware that exiting an illiquid OTM option in the final days before expiry may result in unfavourable prices.

Final settlement of any futures positions created through exercise follows the standard MCX futures settlement process, which can involve either cash settlement or delivery settlement depending on the commodity and the contract month. Most MCX commodity futures are cash-settled, but some - particularly certain gold and silver contracts - can result in compulsory delivery if held to their own futures expiry. Retail traders who are not equipped for physical delivery must ensure they close or roll any futures positions received through option exercise well before the futures delivery window.

Tax Treatment of Commodity Options in India

Taxation of commodity derivatives is an important practical consideration for Indian traders and investors. While tax laws change with each Budget and the specifics of your situation depend on your individual facts and the nature of your trading activity, this section outlines the general framework as it has typically applied, with the strong caveat that you should refer to the latest Finance Act and consult a qualified tax professional for advice specific to your circumstances.

Income from trading in commodity derivatives on recognised exchanges such as MCX is generally treated as business income for tax purposes in India, regardless of whether the trader is an individual, HUF, partnership firm, or company. This is because commodity derivatives trading is considered a business activity rather than an investment activity - unlike equities, where long-term capital gains treatment is available for holding equity shares beyond a year.

Business income is added to your other income and taxed at the applicable income tax slab rates. Losses from commodity derivatives trading can be set off against other business income in the same year, and to the extent they remain unabsorbed, they can be carried forward for up to eight assessment years to be set off against future business profits - subject to the condition that the return of income for the year of the loss is filed on time.

Commodity Transaction Tax (CTT) is levied on non-agricultural commodity futures and options transactions on recognised exchanges. CTT applies to both buyers and sellers, and the rates are specified in the Finance Act. CTT paid is treated as a deduction from business income for tax purposes, providing some relief. Agricultural commodity derivatives are exempt from CTT, which reflects the government's intent to encourage participation by farmers and the agri-commodity ecosystem.

Securities Transaction Tax (STT) does not apply to commodity derivatives; it is specific to equity-related transactions. This is an important distinction: the cost structure for commodity options trading differs from equity options trading on NSE or BSE.

GST (Goods and Services Tax) is applicable on the brokerage and transaction fees charged by brokers and the exchange for commodity derivatives trading. This is a cost to be factored into transaction economics.

For Non-Resident Indians (NRIs) and foreign entities, participation in Indian commodity derivatives is subject to SEBI's eligibility rules and FEMA (Foreign Exchange Management Act) regulations. These rules are updated periodically; NRIs considering commodity derivatives participation should consult SEBI's latest regulations and appropriate legal counsel.

Audit requirements under the Income Tax Act may apply if turnover from commodity derivatives exceeds specified thresholds. The definition of "turnover" for derivatives has specific rules under ICAI (Institute of Chartered Accountants of India) guidance - for options, turnover is typically computed as the absolute sum of premia received on option sales plus the difference in settlement value on exercise. Refer to the latest guidance from ICAI and CBDT (Central Board of Direct Taxes) for current rules.

Example

Key benefits

How it works

1. 1
   Open and Activate a Commodity Derivatives Account

   Ensure your trading account with a SEBI-registered broker is activated for commodity derivatives trading on MCX. You will need to complete the relevant KYC and risk disclosure process as mandated by SEBI.

2. 2
   Choose the Commodity and Contract

   Select the commodity (gold, silver, crude oil, etc.), the option type (call or put), the expiry month, and the strike price that aligns with your view. Review the contract specification on the MCX website for lot size and tick size.

3. 3
   Analyse Premium and Implied Volatility

   Check the current premium quoted for your chosen option, assess whether implied volatility is historically high or low, and calculate your maximum risk (total premium × lot size) and breakeven price before placing the order.

4. 4
   Place the Order and Pay the Premium

   Enter your buy order on the trading platform with the limit price you are willing to pay. On execution, the premium amount is immediately debited from your trading account. No additional margin is required for option buyers.

5. 5
   Monitor the Position

   Track the option's market value, the underlying futures price, days to expiry, and changes in implied volatility. Be aware of time decay, especially in the final two weeks before expiry when theta accelerates.

6. 6
   Exit in Secondary Market or Hold to Expiry

   If the option has moved in your favour, you can sell it in the secondary market to book profit before expiry. If you hold to expiry, ITM options are automatically exercised into a futures position, while OTM options expire worthless.

7. 7
   Manage Post-Exercise Futures Position

   If your option is exercised into a futures position, decide immediately whether to close or hold the position. Holding requires futures margin and exposes you to further price moves; ensure adequate funds are in your account to avoid a margin shortfall.

Formula

Option Premium = Intrinsic Value + Time Value
Call Intrinsic Value = max(Futures Price – Strike Price, 0) | Put Intrinsic Value = max(Strike Price – Futures Price, 0)

Key takeaways

Frequently asked questions

Related terms