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Commentary

Futures and Options on GoldBEES

NSE is introducing Futures and Options on the Gold ETF – GOLDBEES – from April 30. This is quite interesting because no commodity has options on them in India, so in a way this is a first. If you are long Gold, for instance, and are only minorly bullish on it, you might write an out-of-the-money call to earn some income on your holding. Or if you’re slightly bearish you could write a credit call spread – write a lower strike call and buy a higher strike call – which indicates you don’t think the stock will go up too down, probably a little down. If volatility looks rich, you might write strangles or straddles, or use puts to buy insurance if prices go down.Options can be used to reduce risk in all sorts of ways – as it can be to use very high leverage to speculate.

The problem I see is in the strike prices – while there will be 21 strikes, they are separated by a distance of 10 rupees. That’s not much, especially if Gold becomes very volatile. Secondly, there is an expiry day difference – while F&O contracts in stocks trade upto the expiry day (the last thursday of the month), Gold Futures and Options will only trade till one day before expiry. I’m not sure what that means – is the settlement going to be the closing price on expiry day? (i.e. one full day of no trading but prices move in the spot market?) It seems so under the clearing rules. That’s one day of keeping positions open without the ability to hedge appropriately – not desirable.

The lot size is 125 units, which is 125 grams of gold, or about 2 lakhs gross exposure per contract.