A commodity option gives you the right — but not the obligation — to buy or sell a commodity at a fixed price before a set date. On MCX — the worked example in this article — most options are options on futures: exercising one gives you a futures position, not the physical commodity. NSE's commodity derivatives segment (NSE Commodities) sets its own contract specifications, so always check the specification of the exact contract you trade.
How is an option different from a futures contract?
With a futures contract, both sides are locked in: if the price moves against you, you pay, day after day. With an option, the buyer's risk is capped. Farhan pays a one-time premium for a call option on gold; if gold falls, the most he can ever lose is that premium. If gold rises well past his strike price, his option gains value.
If calls, puts, strikes and premiums are new to you, read what are call and put options before continuing — everything there applies here too, with one twist explained below.
What does "option on a futures contract" mean?
In equity, an option's underlying is a share or an index. In commodities, the underlying is usually the futures contract on that commodity, not the commodity itself.
Say Farhan buys a call option on gold futures with a strike of ₹75,000 per 10 grams (illustrative figures throughout). The option's value tracks the gold futures price, not the jeweller's shop rate. If he holds a profitable (in-the-money) option to expiry, he does not receive gold — he receives a long gold futures position at his strike price.
What happens near expiry — the devolvement twist
This conversion of an option into a futures position is often called devolvement, and it is the single most important thing a beginner must know about commodity options.
The sequence works broadly like this:
- Through the option's life, you can buy and sell it freely, like any option.
- If your option expires worthless (out of the money), it simply lapses; the buyer's loss is the premium.
- If it expires in the money and is exercised, it devolves into a futures position — long futures for a call buyer, short futures for a put buyer, with sellers taking the opposite side.
- That futures position needs full futures margin from that moment, which is far more money than the premium you paid. It then carries daily mark-to-market like any futures trade — see how do commodity futures work.
Exchanges typically ask option holders for margins in the final days before expiry precisely because of this. A trader who bought a ₹15,000 option can wake up holding a futures position worth several lakhs if they let it devolve without planning for it.
The practical rule: if you do not want a futures position, square off your commodity option before expiry rather than letting it be exercised.
Why would a trader choose commodity options over futures?
- Capped risk for buyers. A crude oil futures position can lose more than your margin overnight; a bought option cannot lose more than its premium.
- Cheaper way to hold a view through volatile events, since there are no daily MTM debits on a bought option.
- Hedging. A jeweller who fears a gold price spike can buy calls as insurance while continuing to buy metal in the physical market.
Option sellers, by contrast, take on large, margin-backed risk for a limited premium — that side of the trade is not a beginner's instrument.
Things to keep in mind
- Know the expiry date and what happens after it: an in-the-money commodity option becomes a margined futures position, not a cash credit.
- Option expiry on commodities typically falls some days before the futures expiry — check the contract details, don't assume equity-style timing.
- Buying options caps your loss at the premium, but premiums can and often do expire worthless — capped risk is not small risk.
- Liquidity varies widely across commodity options; away from the most active contracts, wide bid-ask spreads can cost more than you expect.
Read next
What moves gold and silver prices? — Instruments covered. Now the prices themselves, starting with the metals most beginners trade first.