Commodity Option

A Commodity Option is a type of derivative contract that gives the buyer the right (but not the obligation) to buy or sell a specific commodity (like gold, silver, crude oil, natural gas, agricultural products, etc.) at a predetermined price (called the strike price) on or before a specified date (called the expiry date).

The seller (also called the writer) of the option, on the other hand, has the obligation to fulfil the contract if the buyer chooses to exercise the option.

Key Features of Commodity Options

1. Underlying Asset – The base commodity, such as gold, silver, crude oil, copper, or agricultural commodities like wheat, soybeans, etc.
2. Premium – The cost paid by the option buyer to the seller for acquiring the right.
3. Strike Price – The pre-decided price at which the commodity can be bought or sold.
4. Expiry Date – The last date on which the option can be exercised.
5. Lot Size – Commodity options are traded in standardised lot sizes (example: 1 kg gold or 100 barrels of crude oil).
6. Types of Commodity Options –
• Call Option → Right to buy the commodity.
• Put Option → Right to sell the commodity.

Example

Suppose an investor buys a Gold Call Option with:

• Strike Price: ₹60,000 per 10g
• Premium: ₹500 per 10g
• Expiry: 1 month

If the gold price rises to ₹62,000, the option buyer can exercise the option and gain (₹62,000 – ₹60,000 – ₹500) = ₹1,500 profit per 10g.
If the price falls below ₹60,000, the buyer can simply let the option expire, losing only the premium (₹500).