What is options trading in commodities?

Options are derivative instruments like futures. In a futures contract, the buyer and the seller are obligated to fulfil the contract. However, an option agreement gives the buyer or the seller the right to transact, but carries no obligation to do the transaction.

In commodities, where prices are so volatile, options trading is like a deposit on the futures contract. The buyer or the seller saves himself/herself from losing too much just in case the futures contract becomes unprofitable for him/her.

Sebi recently allowed options trading in commodities trading in India, but unlike equity options, those in the commodity market will be settled at the futures price on expiry with the option holder converting their positions into futures contracts.