SEBI approves options trading in commodity indices; know why it is unlikely to create market buzz?

MCX stocks are in action today as the Securities and Exchange Board of India (SEBI) has approved options trading in index on the commodity exchanges. Till now, only futures trading was allowed in index on the commodity exchanges, Zee Business' Mrityunjay Kumar Jha tells Zee Business Managing Editor Anil Singhvi. 

The market regulator has approved options trading in the same indices in which futures are being traded. This will be a European style option and the option contract will be settled in the cash, Jha said in his report.

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"In an endeavour to have more products in the Commodity Derivatives Market and based on the recommendation of Commodity Derivatives Advisory Committee (CDAC) and proposal from Stock Exchanges, it has now been decided to permit recognised Stock Exchanges having a Commodity Derivative segment, to introduce options on commodity indices," a SEBI circular issued on Friday, said.

There are total 4 indices in the commodity market viz. BULLDEX which represents Bullion index, METLDEX which represents Base Metal index, ENRGDEX which represents Energy index. Now option trading has been allowed along with futures in these indices.

Though market is seeing this step in a positive light, the index option is not likely to get a good response based on the current scenario according to experts, Jha said. 

He cited various important reasons for this. 

The first is because of liquidity, which is very low in the index future. In the options, it is likely to remain even lower. In the month of March, the volume of the Metal Index futures decreased by 30 pe cent as compared to February and Energy Index by 80 percent.

The second is that the difference between a bid-ask and an index future is huge. According to the data, there is a difference of about 200 points in Energy and 600 points in Metal in Bid Ask.

And the remaining two reasons are immediate reasons. The metal index has that volume of 4-5 lots right now (after 2 hours of market opening), and the bullion index has a volume of about 60 lots. How will it get a response when there is no volume?

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