The commodities market

Commodity futures and options, trading hours by category, contract sizes, margins, physical delivery, and the risks of option devolvement in India.

A commodity is a physical raw material or agricultural product used in production, consumption and trade. Unlike a share or a bond, the underlying is a real thing with its own supply and demand, which is why commodity markets serve producers, consumers, traders and hedgers at once.

There are two quite different things people mean by “trading commodities”. The first is physical trade: buying and selling actual gold, crude oil or cotton under commercial arrangements, with delivery. The second is exchange-traded derivatives: contracts whose value tracks a commodity’s price but which do not necessarily involve you ever owning or taking delivery of the commodity.

That distinction runs through this whole lesson.

What is traded

Commodity contracts on Indian exchanges fall into four broad categories:

These are categories, not a menu. Not every commodity named above has an active exchange-traded contract at any given moment. Exchanges launch and retire contracts, and the current list is the exchange’s product listing rather than anything a lesson can guarantee.

Agricultural prices are especially sensitive to conditions outside the market: weather, crop yields, seasonal supply, storage, government procurement, and import and export restrictions. That makes them volatile, and volatility is a risk fact rather than a character flaw. But so are bullion and energy, and risk varies a lot from product to product and from one contract month to the next. Nothing here is uniformly “the most speculative”.

Where these contracts trade

India’s commodity derivatives are regulated by SEBI and traded on recognised exchanges:

• MCX is the major venue for bullion, base metals and energy derivatives.
• NCDEX is the major venue for agricultural commodity derivatives.
• NSE and BSE also operate commodity-derivatives segments, with product availability that differs by exchange.

Do not assume the exchanges are interchangeable. They list different contracts, run different hours, and apply different rules. A contract that exists on MCX may have no NCDEX equivalent at all.

One thing worth separating clearly: an exchange provides the standardised contract, the trading infrastructure and the clearing arrangement. Your broker provides you access to it. The contract rules are the exchange’s. The square-off times, margin policies and position limits your broker imposes on you are the broker’s, and the two are routinely confused.

Spot, futures and options

Each of the three is a different thing, and the difference that matters most to you is delivery: whether you end up holding the commodity itself or only a cash outcome.

What people use each for differs as well. Producers and consumers deal in spot, to manage the physical flow of the commodity itself. Futures are used for hedging, and for permitted trading. An option is used to cap the loss at the premium, because the premium is the most that can be lost.

A futures contract is a standardised agreement on a specified commodity, quantity, expiry and settlement arrangement. You generally deposit margin rather than paying the whole notional value, and the position is marked to market daily.

A commodity option gives the buyer a right under the contract specifications. Two structures exist in India and they are not the same thing:

• Options on commodity futures, where the underlying is a futures contract. This is the dominant structure and the reason devolvement matters at all, as explained below.
• Options directly on a commodity, where such contracts are offered.

It is not safe to assume every commodity option has a futures contract underneath it, and the exercise and settlement mechanics depend on the specific product rather than on the word “option”.

Reading a contract specification

Commodity contracts are standardised, but not so standardised that you can infer one from another. Before placing an order, read the contract specification. The fields that decide what you are actually trading are:

• Trading symbol, the short code you see on screen.
• Contract size, how many units one lot covers.
• Quotation unit, the price is per unit of what.
• Tick size, the smallest price move the contract can move by.
• Expiry date, when the contract stops trading.
• Initial margin, the margin the exchange requires to open.
• Settlement type, cash or physical.
• Delivery unit and location, if the contract is physically settled.
• Tender period, if the contract has one.
• Position limits, the maximum you may hold.

A worked example

Take a hypothetical commodity futures contract. These figures are an illustration, not any current MCX specification:

Two things follow from that, and beginners usually miss the second:

• You commit ₹70,000, not ₹7,00,000. That is leverage of about ten times.
• A ₹100 move in the quoted price is 100 units × ₹100, or a ₹10,000 gross profit or loss on one lot, before charges and other adjustments.

So a move of 1.4% in the commodity price is a 14% swing on the margin you committed. That is the arithmetic of leverage, and it works identically in the losing direction.

Note what “one lot” means. One lot is 100 units of the contract, which is a claim on a price. It is not 100 units of the physical commodity, and owning the contract is not owning the metal.

Commodity indices

Exchanges publish indices for the commodity complex. On MCX the iCOMDEX family covers composite, sectoral and single-commodity indices, including:

• MCX BULLDEX, a bullion index on eligible gold and silver futures.
• MCX METLDEX, a base-metals index on eligible base-metal futures.
• MCX ENRGDEX, an energy index with historical exchange documentation.

An index and a derivative on that index are different things. Publishing an index does not mean a futures or options contract on it is listed and tradable, and index composition and availability change. Check the exchange’s current product list rather than assuming every published index has an active contract.

Trading sessions

MCX runs different sessions by commodity category, because the categories track international markets to different degrees:

The later close follows the US clock, not the Indian one. Bullion, crude oil and natural gas trade until 11:30 PM while the United States is on daylight saving, and until 11:55 PM when it is not. The same contract therefore has two different closing times in one calendar year. Check the current MCX circular rather than assuming a fixed window.

Two further points:

• Sessions close differently on holidays. MCX declares the morning and evening sessions separately, so a morning holiday can still open the evening session. “The commodity market is closed” is often only half true.
• These are MCX hours. NCDEX, NSE and BSE run their own schedules, as described in the forex lesson for the currency contracts that sit alongside these. Do not carry MCX timings across exchanges.

What moves commodity prices

Several forces act at once, and they do not push every commodity in the same direction:

• Global supply and demand at large.
• Economic growth and industrial consumption, which matters most for industrial metals.
• Weather and seasonal production, which dominates agriculture.
• Geopolitical events, especially for energy.
• Production decisions by major producing countries, including quotas and strikes.
• Inventories and storage capacity, which determine how quickly physical markets can respond.
• Freight and logistics costs, which can matter more than the commodity price.
• Currency movements, particularly USDINR. An Indian buyer of dollar-priced commodities pays more rupees when the rupee weakens.
• Government duties, taxes and import or export policy, which can move a price sharply and quickly.

Different commodities respond to different combinations. Gold tends to react to interest rates, currency moves and investment demand. Crude oil reacts to production, inventories and geopolitics. Copper reacts to industrial activity and supply disruptions. Agri reacts to weather, harvests and policy. Resist any explanation that names a single driver as the reason a price moved.

Futures prices and expiry

A futures price is not simply today’s spot price. It also reflects the cost of carrying the commodity (financing, storage and insurance), any convenience yield from physically holding it, and expectations about future supply and demand.

The relationship is described by two terms, and they are worth using precisely:

• Contango: later-dated futures trade above nearer-dated futures. Comparing a futures price to spot, contango means futures are above spot.
• Backwardation: later-dated futures trade below nearer-dated futures. Comparing to spot, backwardation means futures are below spot.

Contango is the more common shape where storage costs dominate, backwardation appears where immediate physical availability is scarce. Neither term means the market expects prices to fall or rise; it describes the shape of the curve.

Contracts have expiry dates. A trader who wants to keep exposure must close the position before expiry or roll it into a later contract, and rolling has a cost or gain depending on the curve. Holding to expiry also brings the delivery and devolvement questions below into play, which is where a lot of avoidable losses originate.

Margins and liquidity

Margin in commodity futures is set by the exchange and its clearing corporation, based on the contract’s volatility, its value and other risk parameters.

• Initial margin is what you must post to open.
• Exposure or additional margin can be demanded on top as the position moves against you.
• Mark-to-market means gains and losses are settled daily, so a position is reset rather than carried at an old price.
• Margin shortfall arises when your available funds no longer cover the requirement.
• Pre-expiry and delivery-period margin can rise sharply as a contract approaches expiry.

Margin requirements can increase steeply near expiry or during a period of elevated volatility, and that is a normal part of the mechanism rather than a judgement on your trade.

It is not possible to say in general that energy margins are higher than agri margins, or that commodity margins are lower or higher than equity margins. They differ by contract and they move.

Margin parameters are also revised periodically by the exchange and its clearing corporation, not fixed once and left alone. That is why this lesson names no current margin percentage anywhere except the published devolvement framework below, and why that framework is qualified as well. A percentage in an article cannot be kept current; only the exchange’s own schedule can.

Liquidity

Liquidity varies along several axes at once: by commodity, by contract month, by trading session, futures against options, and by option strike and moneyness. Near expiry, a far-from-the-money option can be very thinly traded while the front-month future trades actively.

Three terms describe what you are looking at:

• Bid-ask spread, the gap between the best buy and best sell price, which is the immediate cost of entering or leaving.
• Trading volume, how much actually traded in a period.
• Open interest, the total number of live contracts, a measure of participation rather than of activity.

Low liquidity produces slippage and can make an exit genuinely difficult. That is a real risk, but it is not a property of “options” as a category. There are liquid commodity options and thin ones, and liquid futures months and thin ones.

Cash settlement and physical delivery

Cash-settled contracts settle entirely in money. Final settlement is a payment determined by the contract rules, and no commodity changes hands.

Physically settled contracts mean open positions can create an obligation to deliver or receive the actual commodity, under the exchange’s and clearing corporation’s arrangements.

Some contracts have a tender period or delivery intention period before final expiry. During that window, additional margins, tighter position restrictions and delivery obligations can apply. Whether a contract has one, and when it runs, is contract-specific.

Broker rules are not exchange rules. Brokers commonly impose their own earlier square-off deadlines, block clients from carrying positions into a delivery period, or require extra margin. Those are the broker’s risk-management decisions and they are often stricter than the exchange requires. Read your broker’s published policy rather than assuming either set of rules.

One warning that matters: an automated square-off is not guaranteed to execute. If the market is illiquid or moving sharply, a square-off can fill at a much worse price than intended, or in principle fail. Treating a stop or square-off as certain is a common and expensive mistake.

Commodity options and devolvement

This is the mechanic most often misunderstood, and it is the one most likely to cost you real money.

Many Indian commodity options are options on futures. When such an option expires in the money, the position devolves into the corresponding futures contract. Devolvement is not a punishment. It is the conversion of an option position into a futures position under the applicable rules.

That is a materially different risk. An option’s loss is capped at the premium you paid. The futures position that replaces it is not capped that way, and it carries futures margin and mark-to-market exposure.

Which futures position you end up with

Two entries deserve a pause. A long put exercised becomes a short futures position, and a short put assigned becomes a long one. Both are directionally the opposite of the naive reading of the option’s name, and both surprise people.

Under the MCXCCL rules for European options on futures, these devolved positions are opened at the strike price of the exercised option.

Exercise, assignment, netting and settlement all depend on the applicable contract and clearing rules, so the table is the shape of the mechanic rather than a substitute for your contract specification.

Two separate things happen, and they are easy to merge

Once an option devolves, cash settlement and an open futures position coexist. They are not alternatives.

The exercise or assignment obligation is the difference between the strike price and the underlying’s close price on the day of exercise. Under the MCXCCL framework that difference is settled in cash, on the devolvement day plus one. This is the amount you are owed or owe on the option itself.

The futures position is a real position. It is opened at the strike price, and it is that position which carries further mark-to-market exposure and margin requirements as the underlying moves. Being owed a cash difference does not mean the exposure stops there.

Two consequences follow, and the second surprises people more than the first:

• Cash settlement of the obligation limits the settlement on the option to a known number once the strike and close prices are known.
• It does not limit the futures position to that number. The position is still open, still marked to market daily, and still callable on margin.

So the position you are exposed to after expiry is not “a settled profit”. It is a live futures position with a cash settlement attached to it.

A worked example

You buy a call option on crude oil. You intended a limited-risk position costing a premium.

If that option expires in the money, it does not simply expire. It is exercised automatically and converts into a long crude-oil futures position. That obligation then requires the applicable futures margin, and your maximum loss is no longer the premium you paid.

If you had no intention of holding crude-oil futures, that is an exposure you did not want and may not have the margin to support. This is the risk that catches people: nothing about holding an option feels like holding a futures position, and the conversion arrives on its own schedule.

Why pre-expiry margin rises

Because in-the-money options exercise automatically unless you say otherwise, the clearing corporation has to assume many of them will devolve. The published MCXCCL framework works like this:

• A sensitivity report is published to members four days before the devolvement date, on a “what if” basis: every in-the-money near-month option is identified at that day’s settlement price and converted into futures positions, and margin is computed for that scenario using SPAN.
• Devolvement margin is then levied from the end of the second day before expiry, at 25% of the computed devolvement margin on the day before the devolvement date and 50% of the recomputed figure on the devolvement day itself.
• It is in addition to all other applicable margins, and where devolution would actually reduce margin, no benefit is passed on.

That escalating structure exists because the exposure arrives in stages. It is the mechanism working as designed, not a judgement on your trade.

Treat those percentages as the published framework, not as fixed constants. Margin parameters are revised periodically, and a percentage that is correct when you read this may not be the percentage in force when you trade. The structure above, a rising requirement as devolvement approaches, is the durable part; the exact rates are the part to check.

Avoiding the exposure: close first, instruct second

There are two ways to avoid ending up in a futures position, and they are not equally dangerous.

Close the option before expiry. This is the ordinary answer and it is the right first move. You sell or exercise out the position while you still choose the price, subject to the liquidity actually available and your broker’s own restrictions on trading near expiry. The cost is whatever the bid-ask spread and market movement do to you, and that is a cost you can see and size.

File a contrary instruction. This is the fallback, not the plan. It is only necessary when you could not close, usually because of thin liquidity or a margin call you cannot meet. It forfeits the option’s intrinsic value, which makes it an expensive rescue rather than a routine choice.

The ordering matters. Treating the instruction as the primary mechanism inverts the risk: it is the option you reach for when closing has already failed.

Do Not Exercise (DNE), and what actually happens by default

This is the part most commonly stated backwards, including by people who have heard of it.

For European options on futures on MCX, the default is automatic exercise. MCXCCL’s rules provide:

• All in-the-money option contracts are exercised automatically, unless a contrary instruction has been given by the holder of a long position.
• Those automatically exercised series are then settled in cash as the difference between the settlement price and the strike price. The holder receives that difference.
• All out-of-the-money options expire worthless.
• Exercised contracts are assigned to short positions in that series in a fair and non-preferential manner.

So the position you actually face on expiry is an automatically created cash-settled futures obligation, not an option quietly lapsing. That reframing matters: there is no decision for you to make by default, and no premium already banked that you can simply walk away from.

Where a contrary instruction (often called Do Not Exercise) is given by a long position holder, the in-the-money position expires worthless. That is a real option: it avoids the futures obligation, and it protects you from a margin call you cannot meet.

But it is not free money. An in-the-money option that is not exercised forfeits its intrinsic value, and you paid a premium for it. Using DNE to escape a futures obligation you cannot fund means giving up a settlement you were entitled to receive. In the common case of a devolved position that has moved against you, that is giving up money to avoid a bigger loss. It is a decision to take the smaller certain number rather than the larger uncertain one.

Four qualifications, all of which matter:

• The automatic-exercise and contrary-instruction provisions are described for European options on futures. Exercise style and settlement differ by product, so do not assume this applies to every commodity option you hold.
• A contrary instruction is available on the long side. A short in-the-money option has no equivalent instruction to withdraw from, which is precisely why being short into expiry is the riskier side.
• The exercise window, deadlines and file procedures are operational and change with circulars. Miss the window and the automatic exercise stands.
• Do not assume your broker will submit a contrary instruction for you, or that they can. Confirm it in writing with your broker and check the deadlines. This is the single most consequential assumption in this section.

Broker restrictions near expiry

Brokers may also restrict opening positions, demand additional margin, or attempt to close positions before expiry. Whether a contract is auto-squared-off, and when, is a broker policy, not a universal exchange rule. Cash-settled contracts do not automatically prohibit fresh expiry-day positions either.

The safe reading: check the contract’s exercise, settlement and devolvement rules, and your broker’s expiry policy, before you hold anything to expiry.

An in-the-money commodity option is exercised automatically at expiry unless a contrary instruction is filed, and it becomes a futures position with substantially different margin and risk. Check your contract’s exercise rules, and your broker’s deadlines for filing instructions, before holding anything through expiry.

Where these rules come from, and how to read the current version

The mechanism described here is from MCXCCL’s Consolidated Master Circular for clearing, settlement and exercise. MCXCCL reissues this document annually, consolidating the circulars from the preceding financial year, so there is always a current edition and an older one still in circulation online.

Check the edition date before relying on any of it. MCXCCL’s own position is that where a master circular and an individual circular are inconsistent, the individual circular prevails. A consolidation is a convenience document, not the highest authority, so a specific circular on exercise or margins outranks the summary.

If anything here disagrees with the circular in force on the day you trade, the circular wins.

Mini and micro contracts

Several commodities have smaller mini or micro contract variants, with a smaller trading unit than the corresponding standard contract.

What that does is real but limited. A smaller lot means less notional exposure and a smaller absolute margin for one lot, and for many retail traders it makes the contract accessible at all.

What it does not do is reduce risk as a percentage. If a mini contract is one tenth the size of the standard contract, and the price moves by the same percentage, you lose one tenth as much money and post roughly one tenth the margin. The proportional risk is unchanged.

Do not assume a mini contract is more liquid than the standard, or less. Liquidity and spread vary by product and by contract, and which variant is active changes. Check the exchange’s current product specifications for what exists and what is listed.

Risk management

The practical risks, gathered:

• Leverage and daily settlement. Losses accumulate daily, not just at expiry.
• Overnight international moves. A position held overnight in a commodity that follows international prices can gap substantially before you see it.
• Currency exposure. An INR-denominated position in a dollar-priced commodity carries a second, independent risk.
• Low liquidity and slippage. Exits can cost more than you expect, or not be possible at a sensible price.
• Sudden margin increases. Requirements rise near expiry and during volatility.
• Expiry and delivery obligations. Physically settled contracts can create obligations you did not intend.
• Option devolvement. The subject of the previous section.
• Position limits and exchange controls. Contracts carry price bands, position limits and other trading controls.
• Exceptional market events. Prices can move far outside anything a historical chart suggests.

One point to be honest about: stop-loss orders do not guarantee execution at the requested price. In a fast or thin market, they fill at the next available price, which can be considerably worse.

The habit worth building is knowing the worst-case exposure of a position, not judging a trade by how small the margin requirement looks. A 10% margin is 10% because the exchange expects the position can lose roughly that much in a normal move, and sometimes considerably more.

Next: the crypto market.