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What you must know about Natural Gas Options on MCX?

India’s largest commodity derivatives exchange, MCX, has secured SEBI approval to launch options contract trading on Natural Gas (1,250 MMBTU) futures. These will not be options on the spot commodity but it will be options on futures. To begin with, the MCX will launch 2 contracts on the MCX Natural Gas options.

  • February 2022 contract expiring on 21st February. This contract will devolve in to futures contracts on February 22nd.
  • March 2022 contract expiring on 24th March. This contract will devolve in to futures contract on March 25th.

The February 2022 contract on natural gas options will be available for trading on the  MCX effective from Monday 17th January 2022. Here is how the contract schedule of Natural Gas options will look like for the calendar year 2022.

A quick note on Natural Gas as a commodity

Natural gas is cleanest and safest among energy sources. As the world moves towards a more carbon friendly regime, the weightage of natural gas is growing rapidly in the global energy mix. One of the major factors that made natural gas popular as an energy source was effective transportation mechanism including via tankers and the more popular pipelines.

Some of the key factors influencing the price of natural gas include triggers like the natural gas inventory data, US weather conditions, price of crude, industrial demand, heating demand from households etc. Normally, the demand for natural gas peaks in winter when there is huge demand for heating purposes from across the US and Europe.

Being an international volatile commodity, management of risk via futures and options and other hedging techniques are the key to effective use of natural gas. The MCX already offers Natural Gas Futures, which is one of the more efficient methods of hedging risk of natural gas exposure. With the introduction of Natural Gas Options contracts, there is an additional instrument to manage risk for investors, traders and for corporate users alike.

What you must know about Natural Gas Options on MCX?

Here are some important points to know about the Natural Gas options contracts that will go live on the MCX from 17th January 2022.

  1. The underlying for Natural Gas options will be the Natural Gas futures traded on MCX. All call and put options will be European in nature. While the February and March contracts for 2022 will be available for trading from 17-January, forthcoming contracts will keep adding one trading day after the expiry of the contract.

  2. The trading in the contract will happen from Monday to Friday and the trading session will extend from 9.00 am to 11.30/11.55 pm on all trading days. The options will expire 2 business days ahead of the futures contract expiry.

  3. The trading unit will be with One Natural Futures Gas contract as the underlying and the underlying pricing base is Rs./MMBTU. The price will have a minimum tick size of 0.05.

  4. There will be 15 ITM calls, 1 ATM call and 15 OTM puts available at any point of time taking the total number of call contracts to 31. There will be a similar number of contracts in puts also, so the total number of calls and puts on Natural Gas Options will 62 in all.

  5. The initial margin for the contract will be calculated based on the standard SPAN model. While buying options will only entail premium margins, the sell options will entail a minimum margin of 10% and an additional extreme loss margin of 1%. These margins will change from time to time based on the risk estimate. In addition, the mark to market margin (MTM) will also be calculated and adjusted on a daily basis. Additional and special margin swill be imposed at the discretion of the exchange.

Devolvement of Natural Gas Options into Natural Gas Futures

On expiry of the Options contract they will automatically devolve into underlying futures position and the process will be as under.

  • Long call position shall devolve into long position in the underlying futures contract
  • Long put position shall devolve into short position in the underlying futures contract
  • Short call position shall devolve into short position in the underlying futures contract
  • Short put position shall devolve into long position in the underlying futures contract

All such devolved Futures positions shall be opened at the strike price of the exercised Options.

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