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Option prices signal gold to breach $1,200/ounce; oil to head below $75 |
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MUMBAI: Option prices of gold and crude oil traded on US-based CME group, the world's largest derivatives marketplace, indicate that while the yellow metal could become costlier for domestic users, they could end up shelling out less for oil products such as petrol and diesel in the near- to mid-term. Crude and gold are two of India's largest imports.
The price data indicate that while gold could breach the $1,200 an ounce (32 gm) psychological mark decisively in the short- to mid-term, light sweet crude oil could fall below $75 a barrel. However, the rupee will play an important role as a weaker currency not just offsets a potential fall in the dollar-denominated price, but exacerbates a rise in the international market in rupee terms. The CME group is the world's benchmark for precious metals and energy contracts trading. Indian rules don't allow commodity options trading. Commodity futures are traded here while options trading happens on the over-the-counter market.
The active $1,200 an ounce call option — which lets a buyer purchase gold at that price even if trades higher, and profit by selling it at the higher rate — expiring in February, traded at $34.6 intraday Tuesday, well below its average price of $84.99 since it became available for trading on May 27, Bloomberg data show. However, the option price has been rising steadily from a low of $17.5 on November 6 to $34.6 midnoon on Tuesday.
The rising option price or premium on the call is reflective of the fact that the market is testing a decisive close above the $1,200 level. The $1,200 an ounce corresponds roughly to Rs 26,800 per 10 gm. A rise above $1,200 over the near- to mid-term would mean domestic buyers could have to shell out in excess of Rs 27,000 for gold.
What seems to strengthen this hypothesis is that the premium of the $1,200 put option — which allows a buyer to sell gold at this price even if trades lower and thus profit — has been steadily declining from a high of $74.2 on November 6 to $34.5 intraday Tuesday. When the premium of a put option for a particular level ($1,200 in this case) declines, it means the underlier (gold) is likely to rise above that level.
The rising price hypothesis is also supported by gold prices on local commodity bourse MCX, which takes price cues from Comex. Gold here has risen from a low ofRs 25,461 on November 6 toRs 26,493 intraday Tuesday, a gain of 4%. "Gold is likely to trade at the upper end of a near-term range of Rs 26,200-26,800," said Harish Galipelli, research head, JRG Wealth Management.
However, in the case of light sweet crude, a fall below $75 a barrel seems likely. The price of the active $75 call option expiring in January traded at $2.95, well below its average of $16.3 since June 6, when it opened for trading. The falling price of the option coincides with the fall in crude oil from $97.32 a barrel on June 6 to $75.8 a barrel now.
The $75 oil put rose to $2.22 intraday Tuesday, well above its average price of 59 cents, indicating that underlier could fall below this level shortly..
Source : economictimes.indiatimes.com
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