Unit study guide · NISM Series XVI

Commodity Options

22 questions in this unit

What this unit covers

A warehouse owner buys a put on a commodity to protect a future sale price. What is the option right being acquired?
A commodity-futures call has strike ₹7,000, underlying futures price ₹7,180 and premium ₹245 per unit. What are its intrinsic value and residual time value per unit?
A call with strike ₹600 costs ₹35 per unit. At expiry the underlying is ₹620. On a cash-equivalent intrinsic-value basis, what is the buyer’s net result per unit, ignoring costs and financing?
A trader buys 2 puts covering 100 units each, with strike ₹950 and premium ₹28 per unit. Expiry underlying is ₹900. Intrinsic value is realised in cash equivalent, and total charges are ₹400. What is net profit?
A call writer receives ₹12 per unit on 500 units at strike ₹400. At exercise the underlying future is ₹438, and the resulting futures position is immediately closed at that price. Ignoring all other costs, what is the writer’s net result?
A hypothetical option premium is ₹1.80 per kg. One lot represents 5 tonnes. How much premium is paid for 3 lots, excluding charges? Use 1 tonne = 1,000 kg.
Before expiry, a call’s strike equals its underlying futures price, and its quoted premium is positive. Which statement is correct?
A commodity option has a futures contract as its underlying. When a long put is exercised at strike ₹2,400, what underlying position is created for the put holder under the stated devolvement mechanism?
A trader has written a put on a commodity future. The put is exercised by its holder and assigned to the trader. Which obligation does the writer acquire at the strike?
Why should a participant distinguish a commodity option on goods from an option on a commodity future before expiry?
A European-style commodity option has one month remaining and can be traded in a liquid secondary market. What does “European-style” restrict?
Two analysts use the same option-pricing model and all the same inputs except volatility. One varies volatility until the model value equals the observed market premium. What has been estimated?
A portfolio is long 2 calls with delta +0.60 each and short 3 puts whose long-put delta is −0.40 each. Every option covers 100 units of the same future. Using delta only, what is the approximate gain for a ₹1 rise in that future?
Per unit, an option has delta 0.40 and gamma 0.03. The underlying future rises ₹2. Using ΔV ≈ delta × ΔF + 0.5 × gamma × (ΔF)² and holding other factors fixed, what is the estimated value change per unit?
A long option position covers 400 units. Vega is ₹0.75 per unit for a one-percentage-point rise in volatility. Volatility rises from 18% to 21%. Using a constant-vega approximation, what is the value increase?
A long commodity option has theta of −₹0.20 per underlying unit per calendar day. It covers 300 units. Over three calendar days, using constant theta and holding other inputs fixed, what is the estimated value change?
For a supplied model, an option’s rho is −₹1.50 per unit per one-percentage-point increase in the interest rate. The rate rises from 5% to 5.4%. On 200 units, what is the approximate value change with other inputs fixed?
A commodity call and put are both stated to have positive vega. Underlying price, time, rates and all other model inputs stay fixed while implied volatility increases. What is the local effect on their values?
In a supplied one-period model, a commodity future ends at ₹120 or ₹80 with risk-neutral probabilities 0.5 each. A cash-settled European call has strike ₹100. The discount factor is 0.98. What is the model premium per unit?
An analyst compares a copper call expiring in June with a copper put expiring in July and claims a put-call parity violation. Both have the same strike. What is the central defect in this test?
A call and put on the same future have strike ₹1,000 and the same expiry. Their premiums are ₹42 and ₹27. A trader buys the call and writes the put. At expiry the future is ₹980. Ignoring financing and costs, what is the combined net result per unit?
A valuation model is expressly specified for a call on the September commodity future. Spot, August futures and September futures have different prices. Which quoted price belongs in the model’s underlying-futures input?

Key ideas

From the practice bank · 1

A warehouse owner buys a put on a commodity to protect a future sale price. What is the option right being acquired?

A purchased put protects against a falling underlying price by providing a conditional selling right. A put concerns selling the underlying at its . The holder pays premium for that right rather than undertaking the seller’s option obligation. The exact exercise and settlement mechanism depends on whether the underlying is goods or a futures contract. Buying the option alone is not immediate delivery. Remember: Call holders have a buying right. Put holders have a selling right.

Hint Common mistake: Confusing an option buyer’s right with the writer’s obligation.

XVI-020

From the practice bank · 2

A commodity-futures call has strike ₹7,000, underlying futures price ₹7,180 and premium ₹245 per unit. What are its intrinsic value and residual time value per unit?

measures the favourable underlying-versus-strike difference. The remaining premium is in this stated example. Call intrinsic value = max(₹7,180 − ₹7,000, 0) = ₹180. Residual time value = ₹245 − ₹180 = ₹65. These are per-unit amounts, not multiplied contract amounts. Remember: Premium and intrinsic value are not synonyms.

Hint Common mistake: Reporting the full traded premium as the immediate intrinsic value.

XVI-021

From the practice bank · 3

A call with strike ₹600 costs ₹35 per unit. At expiry the underlying is ₹620. On a cash-equivalent intrinsic-value basis, what is the buyer’s net result per unit, ignoring costs and financing?

describes intrinsic value, while investment profit also includes the premium paid. The option has ₹20 intrinsic value because ₹620 exceeds the ₹600 strike. It is in the money. Net result = ₹20 − ₹35 = −₹15 per unit. Its is ₹635, so an in-the-money can still leave a net loss. Remember: An option can finish in the money without reaching the buyer’s break-even.

Hint Common mistake: Using the strike rather than strike plus premium as a call buyer’s break-even.

XVI-022

From the practice bank · 4

A trader buys 2 puts covering 100 units each, with strike ₹950 and premium ₹28 per unit. Expiry underlying is ₹900. Intrinsic value is realised in cash equivalent, and total charges are ₹400. What is net profit?

Net option profit includes the payoff, the total premium and the stated transaction costs. Intrinsic value = (₹950 − ₹900) × 200 = ₹10,000. Premium paid = ₹28 × 200 = ₹5,600. Net profit = ₹10,000 − ₹5,600 − ₹400 = ₹4,000. No extra exercise-stage futures result is added because the question uses realised intrinsic-value equivalence. Remember: Convert every per-unit amount to the total quantity before adding fixed charges.

Hint Common mistake: Mixing per-unit premium with total contract payoff.

XVI-023

From the practice bank · 5

A call writer receives ₹12 per unit on 500 units at strike ₹400. At exercise the underlying future is ₹438, and the resulting futures position is immediately closed at that price. Ignoring all other costs, what is the writer’s net result?

An option writer keeps the premium but must also recognise the settlement liability when the option is exercised. Assignment of the written call creates the obligation economically equivalent to selling at ₹400 while the underlying future is ₹438. Closing the resulting short future loses ₹38 × 500 = ₹19,000. Premium received = ₹12 × 500 = ₹6,000. Net result = ₹6,000 − ₹19,000 = −₹13,000. Remember: Premium received is not the writer’s final profit until liabilities are included.

Hint Common mistake: Treating an in-the-money written option as though it expired worthless.

XVI-024

From the practice bank · 6

A hypothetical option premium is ₹1.80 per kg. One lot represents 5 tonnes. How much premium is paid for 3 lots, excluding charges? Use 1 tonne = 1,000 kg.

An option’s quoted premium must be multiplied by the underlying quantity represented by all lots. Total quantity = 3 × 5 × 1,000 = 15,000 kg. Premium paid = ₹1.80/kg × 15,000 kg = ₹27,000. The number of contracts is not the number of kg. Remember: Premium quotation units matter just as much as futures quotation units.

Hint Common mistake: Multiplying premium by count while omitting the lot quantity.

XVI-025

From the practice bank · 7

Before expiry, a call’s strike equals its underlying futures price, and its quoted premium is positive. Which statement is correct?

At-the-money refers to equality of the underlying and strike, not equality of the premium to zero. Immediate intrinsic value is max(F − K, 0), which is zero at F = K. Before expiry, potential future favourable movements can support a positive premium. In this example the premium is residual time value. Remember: Moneyness ignores what you paid for the option.

Hint Common mistake: Using to decide whether the underlying is above the strike.

XVI-026

From the practice bank · 8

A commodity option has a futures contract as its underlying. When a long put is exercised at strike ₹2,400, what underlying position is created for the put holder under the stated devolvement mechanism?

A put holder’s selling right translates into a short underlying futures position when a futures option is exercised. The long put provides a right to sell the futures contract at the strike. Exercising it therefore opens a short futures position at ₹2,400. The option premium is a separate cash flow. Physical delivery depends on the underlying future and subsequent position management, not merely on the name of the option. Remember: Translate a futures-option right into the direction of the resulting future.

Hint Common mistake: Confusing the underlying future with immediate physical goods.

XVI-027

From the practice bank · 9

A trader has written a put on a commodity future. The put is exercised by its holder and assigned to the trader. Which obligation does the writer acquire at the strike?

The writer takes the opposite side of the exercised option holder’s right. A put holder sells the underlying future at the strike. The assigned put writer must take the buying side. Thus the writer receives a long futures position at the strike. Margin and later futures settlement can then become relevant even though option premium was received earlier. Remember: On assignment, a short put becomes long the futures underlying.

Hint Common mistake: Remembering only the premium receipt and forgetting post-assignment exposure.

XVI-028

From the practice bank · 10

Why should a participant distinguish a commodity option on goods from an option on a commodity future before expiry?

The identity of the underlying determines what right is exercised and what settlement arrangements apply. An option on goods concerns the goods directly under the contract’s delivery mechanism. A futures option can devolve into an underlying futures position. The participant must read the exact exercise, delivery and margin terms instead of assuming that every commodity option settles as a cash-only premium trade. Remember: Read the underlying and settlement mechanism, not just the word “option”.

Hint Common mistake: Assuming that closing an option and exercising it have the same operational result.

XVI-029

From the practice bank · 11

A European-style commodity option has one month remaining and can be traded in a liquid secondary market. What does “European-style” restrict?

Exercise uses a contractual right against the writer. Selling an existing option transfers the market position. European-style exercise takes place at expiry under the option’s terms. That exercise restriction does not by itself prohibit a secondary-market sale. An owner may close the option through an available market trade before expiry. Execution still depends on liquidity and the contract’s trading rules. Remember: Exercise, offsetting sale and expiry are different events.

Hint Common mistake: Assuming that a European option must be held until expiry.

XVI-030

From the practice bank · 12

Two analysts use the same option-pricing model and all the same inputs except volatility. One varies volatility until the model value equals the observed market premium. What has been estimated?

Implied volatility is inferred by matching an option price under a specified model. The observed option premium is the target and volatility is the unknown parameter adjusted to match it. The result depends on the model and the remaining inputs. It is not a promise that future realised price fluctuations will match the estimate. Remember: Implied volatility is price-implied and model-dependent, not a certainty about future volatility.

Hint Common mistake: Treating implied volatility as a guaranteed forecast.

XVI-094

From the practice bank · 13

A portfolio is long 2 calls with delta +0.60 each and short 3 puts whose long-put delta is −0.40 each. Every option covers 100 units of the same future. Using delta only, what is the approximate gain for a ₹1 rise in that future?

Position delta includes the sign of the holding and the quantity represented by each option. The long calls contribute 2 × 100 × 0.60 = +120 units of delta. Shorting a put reverses its long-holder delta. The three short puts contribute −3 × 100 × (−0.40) = +120. Total delta is +240. A ₹1 underlying rise therefore gives an approximate ₹240 gain, with other factors unchanged. Remember: Apply the long-or-short position sign before aggregating Greeks.

Hint Common mistake: Using a long put’s negative delta unchanged for a short put.

XVI-095

From the practice bank · 14

Per unit, an option has delta 0.40 and gamma 0.03. The underlying future rises ₹2. Using ΔV ≈ delta × ΔF + 0.5 × gamma × (ΔF)² and holding other factors fixed, what is the estimated value change per unit?

The second-order gamma term adjusts the first-order delta estimate for curvature. Delta contribution = 0.40 × ₹2 = ₹0.80. Gamma contribution = 0.5 × 0.03 × 2² = ₹0.06. Total estimated increase = ₹0.86 per unit. The expression is a local approximation using the supplied starting sensitivities. It is not an exact revaluation for every price movement. Remember: For a second-order approximation, gamma enters with one-half times the squared price change.

Hint Common mistake: Using delta plus gamma without respecting their different units.

XVI-096

From the practice bank · 15

A long option position covers 400 units. Vega is ₹0.75 per unit for a one-percentage-point rise in volatility. Volatility rises from 18% to 21%. Using a constant-vega approximation, what is the value increase?

Volatility sensitivity must use the unit in which vega is stated. The change is 3 percentage points, not 0.03 percentage points. Estimated increase = ₹0.75 × 3 × 400 = ₹900, holding the underlying price and other inputs fixed. Remember: Use the change in volatility in the same units as the quoted vega.

Hint Common mistake: Confusing percentage points with decimal percentages.

XVI-097

From the practice bank · 16

A long commodity option has theta of −₹0.20 per underlying unit per calendar day. It covers 300 units. Over three calendar days, using constant theta and holding other inputs fixed, what is the estimated value change?

Time sensitivity must be applied using the period and position quantity in its definition. Per-unit change = −₹0.20 × 3 = −₹0.60. Total change = −₹0.60 × 300 = −₹180. The question specifically uses calendar days and supplies a constant-theta approximation. Remember: Check whether theta is quoted per calendar day, trading day or another period.

Hint Common mistake: Applying a time sensitivity without checking its period convention.

XVI-098

From the practice bank · 17

For a supplied model, an option’s rho is −₹1.50 per unit per one-percentage-point increase in the interest rate. The rate rises from 5% to 5.4%. On 200 units, what is the approximate value change with other inputs fixed?

Rho measures interest-rate sensitivity, and its sign and percentage-point convention must be retained. The rate increase is 0.4 percentage point. Per-unit effect = −₹1.50 × 0.4 = −₹0.60. For 200 units the change is −₹120. This supplied negative rho is not a claim that all calls or all commodity options have the same rho sign. Remember: Use the supplied sensitivity rather than assuming every option type has a fixed Greek sign.

Hint Common mistake: Confusing a 0.4-percentage-point move with a 4% or 0.04-point move.

XVI-099

From the practice bank · 18

A commodity call and put are both stated to have positive vega. Underlying price, time, rates and all other model inputs stay fixed while implied volatility increases. What is the local effect on their values?

Vega concerns the size of possible price fluctuations, not their bullish or bearish direction. Positive vega means that an increase in volatility increases the option’s value locally. This property is explicitly given for both options. A call and a put can both benefit from increased uncertainty. That does not imply that their deltas have the same sign. Remember: Separate volatility exposure from directional price exposure.

Hint Common mistake: Assuming that a benefit to a call must be a loss to a put.

XVI-100

From the practice bank · 19

In a supplied one-period model, a commodity future ends at ₹120 or ₹80 with risk-neutral probabilities 0.5 each. A cash-settled European call has strike ₹100. The discount factor is 0.98. What is the model premium per unit?

Risk-neutral model valuation discounts the probability-weighted option payoff, not the payoff of the average underlying price. The two call payoffs are max(120 − 100, 0) = ₹20 and max(80 − 100, 0) = ₹0. Expected model payoff = 0.5 × ₹20 + 0.5 × ₹0 = ₹10. Discounted value = 0.98 × ₹10 = ₹9.80. The given probabilities are pricing-model probabilities. They are not asserted to be actual forecasts of the two outcomes. Remember: Apply the payoff separately in each state before averaging and discounting.

Hint Common mistake: Taking the option payoff of the expected underlying price.

XVI-101

From the practice bank · 20

An analyst compares a copper call expiring in June with a copper put expiring in July and claims a put-call parity violation. Both have the same strike. What is the central defect in this test?

Put-call parity compares properly matched contracts and financing conventions. Matching only the commodity and strike is insufficient. The expiry and exact underlying future must also match for the standard comparison. The additional month changes the put’s payoff date and exposure. The quoted difference therefore cannot be classified as a parity violation from these facts alone. Remember: Check underlying, strike, expiry and financing assumptions before testing parity.

Hint Common mistake: Treating similarly named options as interchangeable hedging legs.

XVI-102

From the practice bank · 21

A call and put on the same future have strike ₹1,000 and the same expiry. Their premiums are ₹42 and ₹27. A trader buys the call and writes the put. At expiry the future is ₹980. Ignoring financing and costs, what is the combined net result per unit?

A long call plus short put has a linear strike-based expiry payoff, but net profit must also include its initial net premium. Initial net premium paid = ₹42 − ₹27 = ₹15. At ₹980, the call payoff is zero and the written put owes ₹20. Combined expiry payoff = ₹980 − ₹1,000 = −₹20. Including the initial debit gives −₹20 − ₹15 = −₹35. This is a payoff calculation only. The question does not assert that the supplied premiums and an unspecified current futures price satisfy parity. Remember: Synthetic payoff identities do not eliminate the initial premium cash flow.

Hint Common mistake: Equating a terminal payoff identity with equal net profit from any acquisition price.

XVI-103

From the practice bank · 22

A valuation model is expressly specified for a call on the September commodity future. Spot, August futures and September futures have different prices. Which quoted price belongs in the model’s underlying-futures input?

A model input must correspond to the actual underlying specified by the derivative contract. The option is on the September future, so the relevant futures-price input is that contract’s price. Spot and another expiry may help analyse the curve, but substituting them changes the modeled exposure. The option premium is the model output or calibration target, not the underlying price. Remember: Match model inputs to the exact underlying, not just the commodity name.

Hint Common mistake: Using the nearest visible market price without checking the contract identifier.

XVI-104

Read the related lesson

Strike Price

The strike price is the level at which an option can be exercised.

Intrinsic Value

Intrinsic value is the part of an option's premium that would survive if the contract expired at this instant.

Time Value

Time value is the part of an option's premium that is left after intrinsic value is taken out.

Moneyness (ITM, ATM, OTM)

Moneyness describes where an option's strike sits relative to the current level of the underlying.

Breakeven

Breakeven is the point at which a defined result is exactly zero.

Expiry Day

Expiry day is the last day on which a derivative contract can be traded.

Lot Size

Lot size is the number of units of the underlying that one derivatives contract stands for.

Option Premium

An option's price is its premium.