Commodity Derivatives

&
Risk Management

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Lecture 26
Commodity Options (cont.), Put-Call Parity & Ratio

Dr. Prabina Rajib, VGSOM,

Dr. Prabina Rajib

N Professor
Vinod Gupta School of Management

&IIT Kharagpur
IIT Kharagpur, 721302
prabina@vgsom.iitkgp.ac.in
 Commodity options settlement on expiry (RECAP)
Image source: www.mcx.com

• Exchange traded commodity options have commodity futures as underlying .

• On expiry of the option contracts, option position holders take position in the underlying
commodity futures
• Option expiry date is always before the underlying futures contract expiry.

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• On the option expiry date, daily settlement price (DSP) of the underlying futures contract is
compared with the exercise price for each option to decide whether an option is ITM or OTM
option.
Out-of-Money(OTM) options expire. In the money (ITM) options are exercised into futures

Dr. Prabina Rajib, VGSOM, IIT Kharagpur

•

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contracts.

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Commodity options settlement on expiry (RECAP)

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Dr. Prabina Rajib, VGSOM, IIT Kharagpur

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All OTM options Expire

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Pricing of Options on Futures (European Option)
Black 76 Model

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Dr. Prabina Rajib, VGSOM, IIT Kharagpur

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 Pricing of Options on Futures
Option Calculators:
https://www.mcxindia.com/awareness-corner/options-calculator
https://www.cmegroup.com/tools-information/quikstrike/options-calculator.html
Spot Date: 29 May 2023

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Dr. Prabina Rajib, VGSOM, IIT Kharagpur

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 Option Premium
(Intrinsic Value & Time Value)
• Option Premium consists of Intrinsic value and Time value.
• In fact, Time Value = Option Premium – Intrinsic value
• Intrinsic value of an option: The instantaneous benefit the long position holder gets,
if the option is exercised.

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• Intrinsic value for Call = Maximum (Underlying Asset Price- Exercise Price, 0)
 For In-the-Money Call, the intrinsic value > 0

Dr. Prabina Rajib, VGSOM, IIT Kharagpur

 For Out-of-Money Call, the intrinsic value = 0 because the long call position will

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never exercise the option.
• Intrinsic value for Put= Maximum (Exercise Price - Underlying Asset Price, 0)
 For In-the-Money PUT, the intrinsic value > 0

•
exercise the option. N
 Out-of-Money PUT, the intrinsic value = 0 because the long put position will never

Even though, even though out-of-money options have zero intrinsic value, these still
command a premium.
 Option Premium
(Intrinsic Value & Time Value)

• Option Premium = 6.73

 Intrinsic value (Call) = Max (6007-6300,0) = 0

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 Time Value (Call)= Option Premium –
Intrinsic value = 6.73 – 0 = 6.73

Dr. Prabina Rajib, VGSOM, IIT Kharagpur

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• Put Premium = 299.37
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 Intrinsic value (Put) = Max(6300-6007,0)= 293
 Time value = 299.37 - 293 = 6.37
 Option traders expectations
• From a trader’s trading
details one can judge
their price expectations.

• Based on the opening

trade premium,

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• Long Call has bullish
view

Dr. Prabina Rajib, VGSOM, IIT Kharagpur

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• Short Call has bearish
view

• Long Put has bearish

•
view

Short put has bullish

view
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 Put-Call Ratio
Image Source: MCX Website
https://www.mcxindia.com/market-data/put-call-ratio

• Put-Call ratio is another way of

judging the traders' collective
expectation.

• Put-Call ratio (PCR) (for a given

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exercise and given
maturity):Ratio of put open
interest to call open interest.

Dr. Prabina Rajib, VGSOM, IIT Kharagpur

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• PCR (21-Jun-23, 70000) = 604/142
= 4.53

• PCR (commodity wise) : Ratio of

•
total OI for all PUT options to all
CALL options for all exercises and
all maturity.

PCR >1 indicates a bearish

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market as more number of traders
have open position in put than
call.