Basics of Commodity Trading In India

Commodity trading is one of the oldest forms of trading in the world, although it is not so popular in India like stock market trading. But I think commodity trading has better opportunities for day job holders and for those who don’t have enough time at day time to trade in stock market because commodity market remain open up to 11.30 PM night.

In this article we will discuss about the basics of commodity trading in India, how to trade in commodity market in India, commodity market timing, commodity trading account opening etc.

Table of Contents

• How to start Commodity Trading
• Commodity trading account opening
• MCX Commodity trading market timing
• Types of Commodities
• How to trade commodities – types of commodity trading
• Commodities Lots & Lot Sizes
• Commodity derivatives trading
• Commodity Futures trading
• Commodity Futures Mini Contracts
• Commodity Options trading
• Points to note about Commodity trading

How to start Commodity Trading

As like we trade stocks or equities in stock exchanges like BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) in India, the Multi Commodity Exchange (MCX) is for commodity trading. And if you have a Demat-cum-Trading account of any broker for stock trading and investing, then you can trade commodity with that trading account, you just have to activate the Commodity Segment of your broker trading account. Otherwise if you are completely beginner then you have to open an account with any of the brokers.

Commodity trading account opening

As I am also a small retail trader, so like any other retail trader I prefer Discount Brokers like Zerodha, Fyres, Upstox, AngelOne etc to open a demat cum trading account for both stocks and commodity trading. But you can choose other full service brokers also and almost all the stock brokers in India offer Commodity trading facilities. I personally prefer Fyres trading account, because its good services & features like multiple charts on one screen, trading view charts and features, directly trading from chart etc those are suitable for Intraday, Futures & Options trading.

MCX Commodity trading market timing

MCX Commodity market in India remains open from 9.AM morning to 11.30 PM night on Monday to Friday.  MCX market has two sessions that is Morning Session from 9.AM to 5.PM and Evening Session 5.PM to 11.30 PM. Sometimes the evening session is extended up to 11.55 PM according to changes in US Market timing. And on most of the holidays the evening session of the MCX market remains open, so we can trade commodities in holidays also, that is a good opportunity for job holders.

Types of Commodities

There are generally two types of commodities, those are

(1) Agri-Commodities or Agricultural Commodities like Cotton, Kapas, Palm Oil etc and

(2) Non-Agri-Commodities are basically

(2.1) Precious Metals or Bullion like Gold and Silver,

(2.2) Base Metals like Aluminium, Copper, Lead, Zink etc and

(2.3) Energy like Crude Oil & Natural Gas.

How to trade commodities – types of commodity trading

In stock market or stock trading we can buy stocks, take its delivery hold in our demat account as long as we wish, and also we can buy or sell any number of stocks. But in Commodity trading we trade in commodity derivatives, that is Futures & Options contracts, and we have to trade in Lots only.

Commodities Lots & Lot Sizes

Lots are a specific amount or number of quantity decided by the exchange. We cannot trade single quantity or any number of quantity but we can trade any number of lots (that depends on capital amount we have in our trading account). The Lot Size or number of quantity in a lot is different for different commodities. Like One Lot of Crude Oil is consists of 100 barrel and 1 Lot of Gold contains 1.KG.

Commodity derivatives trading

As we may know that derivatives or Future & Options contracts have an expiry date or the contract has a specific duration until which we can hold it, and after that duration the contract will be expired and our trade position will be closed. So we can buy a futures or options contract and hold it up to its expiry date only, not as long as we wish like we hold stocks in our demat account.

And in Futures & Options contract we can first sell without having it in our holding and then buy it to book profit. That means as we trade Futures & Options derivative contracts only in commodity market, so we can

(1) First buy at lower price then sell in a higher price to make profit or also we can

(2) First sell at a higher price then buy at a lower price to make profit. In this way we can trade both in a rising market and falling market also.

Generally the duration of Commodity contracts are one month or monthly contracts. But the duration of Gold Futures contract is two months and Silver Futures contract duration is three months. The Commodity Options contracts are monthly contracts of one month duration.

We can trade both Futures and Options contracts of commodities with our trading account in MCX. Lets discuss the features and differences of Commodity Futures and Options trading. If you are completely beginner then you may read here about the basics of futures & options trading.

Commodity Futures trading

In Futures trading we have to pay a margin amount that is normally one third to one fifth of the total amount we buy or sell. For example if we buy one lot (100 barrels)of Crude Oil current month contract we have to pay margin amount of nearly Rs.3 Lakhs, where the actual price of 1 lot or 100 barrels of Crude Oil at the current price of Rs.6600 per barrel would be Rs.6.6 Lakhs. So here we have to pay less than half price as a margin amount to trade. This is called as leverage. Generally we get 3X to 5X leverage in commodity futures trading. The leverage amount is different for different commodities depending up on the volatility of that instrument and duration of the contract.

Commodity Futures Mini Contracts

There are a lot of small retail traders who may not afford big margin amount to trade Commodity Futures. So MCX has some Futures Mini contracts which are of smaller lot size, approximately one tenth sizes. And the margin amount also smaller accordingly, which small retail traders can trade with small capital. For example the lot size of Crude Oil Futures contract is 100 barrel and the current month contract requires approx 2.5 to 3 lakh margin, where as the Crude Oil Mini Futures contract of MCX is of 10 barrel lot size which requires Rs.25000 to Rs.30000 margin amount. Here due to smaller lot size, the profit will be small but the loss will also be smaller and beginner retail traders can trade it with low risk.

Commodity Options trading

On the other way there are Options contracts also in which we trade the options premium amount that changes according to the change in price of the base instrument or commodity. Traders who have traded Nifty, Bank Nifty, Fin nifty or Stock Call & Put (CE & PE) Options in stock market are very well know about options trading. Who are complete beginner and don’t know about Options trading may check our this article to get a brief knowledge about it.

In Commodity Options trading the expiry duration of contracts are monthly; therefore it requires some more premium to pay if we want to Commodity Options buying. We require approximately Rs.20000 to 30000 to buy one lot of Commodity Call or Put Options (CE or PE). But it gives an advantage also, because in monthly options contracts due to longer duration the Premium Time Decay or Theta Decay is also not so fast. Hence we don’t have to worry much more about Options Greeks like Theta, Delta or Gamma.

In case of Commodity Options Selling the required margin amount is almost similar to the Futures contract margin amount. The benefit of options selling compared to futures is the benefit of time decay or theta decay but the profit also decreases according to the delta of the strike price. Generally the delta of an ATM (At The Money) strike price is happens to be 0.5, that means for 100 points change in underlying instrument or future contract the premium will change 50 points.

Points to note about Commodity trading

Most of the small retail traders often prefer Options buying as it requires less capital to trade. Although the Commodity Options buying requires more capital compared to Nifty, Bank Nifty or Index Options, but here the risk of losing capital also smaller due to slower time decay of premium.

The major issue in Commodity Options trading is lower liquidity. You may not get enough volume or liquidity in all strike prices of all commodities. Although Crude Oil and Natural Gas options have good volume & liquidity but not as much as index options.

Sometimes the ATM (At the money) strike prices of some commodity like Gold, Silver, Copper etc also may not have enough volume to trade. In this case we have first check where proper volume is available and trade those strike price contracts only, otherwise we may not get proper entry and exit. We can check the commodities options volume, open positions, open interest, change in open interest etc in the MCX Option Chain available in MCX official website.

Another problem we face due to lower liquidity is large gap between Bid & Ask price that is the buying price is higher and selling price is lower. For which sometimes we place buy or sell order at a price but it may execute at a very different higher or lower price and we may face unnecessary losses. This happens in both Options & Futures contracts of some commodity also. So to avoid these situations we should always check the difference between the Bid & Ask price and try to place Limit Orders instead of Market Orders while buying or selling.

One more thing we must remember about commodity trading that all the commodities are cyclical in nature and are traded in all major international markets, so their prices are internationally linked. Therefore all the major international events, news etc have direct or indirect impact on prices of commodities. We have to be aware and alert about these while trading in commodity market. You can check Economic Calendar of Investing.com to track various global news and events which may affect the commodity market.

That’s all in this article where I have tried to give a brief description about how to trade in MCX Commodity market in India. For more detailed information about various concepts of commodity trading you can check our future articles coming soon. Thanks for visiting once again.