How will option trading in guar benefit to farmers ?

On 14th January finance minister launched option trading in commodity market NCDEX for Guar. This is first of its type in agriculture commodity. Success in guar will be replicated in other commodities. Before Guar option trading was started in Gold by MCX. Though future trading gives a hedging tool to farmer and trader. In future trading there is obligation of contract.  Option trading gives  right but not obligation to buy or sell. Farmers and trader will have option to come out from contract before a specific date he is not obligated to full fill the contract.

There are two type of option ,

(i) Call : gives  right not obligation to holder to purchase a future contract at a pre-mentioned price on or before a date . In lay man language it is a buy contract. Call option is generally used as safeguard against rising price.

(ii) Put option gives right but not obligation to sell a future contract at a pre mentioned price on or a specific date. In lay man language it is sell contract. Put option is generally used as safeguard against falling price.

These are contract with option of exit before or on dates. In our normal life we give some advance for a buying of car or property with an option of complete payment after 15 days or 30 days. meanwhile we find that prices fall after five days and we are getting some cheap option then we buy another car or land and let the advance with seller. In another case we find that after 5 days prices of car property rise in market. they  we will have option to buy that particular car or property at lower price than market and we execute our contract.

In existing future  contracts we have obligation to execute the contract in the case of falling prices we can exit from contract after making the payment of margin money. That is liability of of investor to settle that amount. Option trading will attract more farmers and investors as there is no chance of loss. NCDEX has launched three options in guar February, March and April for this cropping season. Option trading will give stability in market price of Guar.

First option of guar will close on 28th February.  It will secure farmer against the falling price. If farmer get good prices in market higher than what he has option in hand, then he can exit from contract.  IF the prices fall in market then farmer will execute his option and it it will make farmer winner.

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