Stock exchange National Stock Exchange (NSE) said on Wednesday that its natural gas options contracts — a kind of derivatives — have registered unprecedented volumes, signalling increasing participation in the domestic commodity derivatives segment. According to information available in an infographic shared by the bourse, the options contract — an instrument providing the buyer with the righ, not obligation, to sell an underlying asset at a set price within a specific time.
The options contract secured its highest-ever single-day activity as of 8:00 pm on July 22, according to NSE.
Here are two important details about the milestone:
- The options register their highest-ever intraday volume, at 1,28,000 contracts
- They secure their highest-ever open interest in intraday deals, at 10,000 contracts
An all-time high turnover suggests that more traders and market participants are increasingly using options contracts to manage price risks or take positions on movements in the respective commodity’s rates.
In this case, the commodity involved is natural gas.
What do options let traders do?
Options are a specific type of derivatives contracts that can be broadly classified into two categories:
- Call option: Gives the buyer the right to buy the underlying asset at a fixed price
- Put option: Gives the buyer the right to sell the underlying asset at a fixed price
Unlike futures contracts, another type of derivatives, where both parties are obligated to complete the transaction on expiry, options offer greater flexibility because the buyer can choose whether or not to exercise the contract.
In options, the buyer pays an option premium for this right, while the seller — also known in market parlance as the writer — receives the premium in exchange for taking on the obligation if the buyer exercises the option.
What are derivative (futures and options) contracts?
Derivatives are financial instruments whose value is derived from an underlying asset. These underlying assets can include:
- Stocks
- Equity indices
- Commodities
- Currencies
- Interest rates
The two most commonly traded derivative products are:
Futures require both buyer and seller to honour the contract at expiry. On the flip side, options provide asymmetric rights and obligations — this makes popular as a hedging instrument and a defined-risk trading strategy tool.
When did NSE launch natural gas options?
The bourse had rolled out natural gas options subsequently after launching their futures in 2021. The move was part of its expansion into commodity derivatives.
The exchange has also periodically refined contract specifications, including expiry-related changes, to improve liquidity and align the contracts more closely with market requirements.
Why does strong trading volume matter?
High trading volume is generally viewed as a sign of a healthy and liquid market.
What an unprecetented degree of volumes essentially indicates is that a larger number of buyers and sellers participated in the market. This makes it easier for traders to enter and exit positions without significantly impacting prices.
What does open interest signal?
Open interest represents the total number of outstanding derivative contracts that remain active and have not yet been squared off or settled.
When rising trading volumes are accompanied by higher open interest, market participants often interpret it as evidence of fresh participation and increasing engagement in the contract.
