Commodity options on Zerodha

Commodity options on Zerodha are MCX options on commodity futures, listed on the Multi Commodity Exchange of India, a SEBI-regulated commodity exchange, covering gold, gold mini, silver, silver mini, crude oil, and natural gas, and they differ from equity index options in one mechanic that surprises traders: an in-the-money option does not cash-settle at expiry but devolves into a position in the underlying futures contract at the strike price. Once the commodity segment is active on Zerodha Kite , these options trade alongside the corresponding MCX futures.

The distinction that defines them is in the underlying. A Nifty option is an option on an index; a gold option on MCX is an option on the gold futures contract. The option references the future, the future references the metal or the energy benchmark, and at expiry the option resolves into the future rather than into cash. That extra layer is why a commodity-options trader has to understand futures margin, devolvement, and the energy-option expiry quirk before holding a position into expiry. This article sets out the underlyings, the Black 76 pricing basis, the lot and margin structure, and the devolvement mechanic in full, because devolvement is the part that turns a small option premium into a large margin requirement overnight.

Conflict-of-interest disclosure. This article is published by the WebNotes Editorial Team for informational purposes and is written independently. WebNotes operates a Zerodha account-opening referral programme, disclosed on the pages that carry the referral link; this article does not carry it and earns no referral commission from anything described here. All figures cite publicly available MCX and SEBI documentation and may change; verify current specifications before trading.

Options on futures, not options on spot

Every MCX commodity option is an option on a futures contract. The underlying of a gold mini call is the gold mini futures contract, not the spot gold price; the underlying of a crude oil put is the crude oil futures contract. This matters for three reasons.

First, the option’s price tracks the futures price, not the spot. A trader watching the option has to watch the corresponding future, because that is what the strike is measured against.

Second, the pricing model is Black 76, the futures-options variant of the Black-Scholes model. Black 76 takes the futures price as its input and discounts the resulting premium back to the present, rather than starting from a spot price and adding cost of carry. The Greeks, delta, gamma, theta, and vega behave as in equity options, but they are computed against the futures price. The conceptual grounding is in how to read option Greeks on Kite and futures and options .

Third, settlement at expiry is into the future. An equity index option cash-settles against the index close; an MCX commodity option, if in the money, becomes a futures position. That is devolvement, and it is the core of this article.

The underlyings and their options

MCX lists options on the principal futures contracts. The option lot matches the underlying futures lot, so the option carries the same size and the same quotation unit as the future it references.

A trader who wants option exposure scaled to a retail account uses the options on the mini futures: gold mini options, silver mini options, and natural gas mini options carry the smaller underlying lot, so both the premium and the eventual devolved futures position are sized down. The bullion mini contracts and natural gas references cover the underlying futures specifications.

Devolvement: the mechanic that surprises traders

Devolvement is the conversion of an in-the-money option into a futures position at the strike on expiry. It is the single most important thing to understand about MCX commodity options, because it changes the position, the margin, and the risk overnight.

On expiry, MCX devolves every in-the-money option that has not been squared off into the current-month futures contract at the option’s strike price. The intrinsic value is settled in cash; the trader is left holding a futures position.

A worked example, using the structure of a crude oil call. Suppose a trader holds a crude oil 5,600 call (CE) into expiry and crude oil futures settle at 5,700:

• The option is in the money by 100 (the futures price 5,700 minus the strike 5,600).
• The option devolves into a long crude oil futures position at 5,600.
• The trader receives the intrinsic value of 100 per barrel in cash settlement on the option.
• The trader now holds a crude oil future, which requires futures-level margin to carry overnight.

The mirror applies to a put: an in-the-money put devolves into a short futures position at the strike. The cash settlement of intrinsic value happens on the option expiry day; the devolved futures position then lives on as an ordinary future, marked to market daily, until the trader squares it off or it reaches its own expiry.

The trap is the margin. A trader who bought the option paid only the premium, perhaps a few thousand rupees. After devolvement, the same trader holds a futures position that requires the full futures SPAN plus exposure margin, which can be tens of thousands of rupees. The position changed from a premium-funded option to a margin-funded future overnight.

What Zerodha does on the devolvement day

Zerodha manages the devolvement risk on the client’s behalf, but the trader has to act on the warnings.

Ahead of expiry, Zerodha warns holders of in-the-money options that the option may devolve into a futures contract and that adequate margin for the futures contract must be in the account, typically by 7:00 PM on expiry day, to avoid square-off.

On the devolvement day, Zerodha checks the net futures position the client would hold after devolvement. If the account has enough margin for the equivalent futures position, the option is allowed to devolve and the future is carried. If the account lacks the futures-level margin, Zerodha squares off the option before expiry rather than let it devolve into an unfunded futures position.

Zerodha also reduces close-to-the-money (CTM) option strikes as a precaution, not only the in-the-money strikes. A strike that is near the money at expiry can be squared off even if it is not yet in the money, because a small move would push it into devolvement. A trader holding a near-the-money option into expiry should expect it to be closed by the risk desk rather than carried.

The energy-option expiry quirk

Crude oil and natural gas options on MCX expire about two business days before the underlying futures. This catches traders who assume the option and the future share an expiry date. A crude oil option holder who plans to square off “on the futures expiry” finds the option has already expired and devolved two days earlier. The bullion options expire on their own schedule, distinct from the energy options. The practical rule is to read the specific option contract’s expiry on the MCX contract specification or the Kite contract details, not to assume it matches the futures expiry.

A further bullion quirk: because the gold and silver standard futures are not monthly while their options are monthly, two consecutive monthly options can devolve into the same underlying futures contract. A gold October option and a gold November option can both devolve into the gold December future. And if the matching futures month is not trading, the option devolves into the next available futures month.

Margins on commodity options

The margin treatment splits between buyers and sellers.

An option buyer pays only the premium to enter. There is no margin on a long option position beyond the premium. The buyer’s exposure changes only at expiry: an in-the-money long option devolves into a future, at which point the buyer needs futures-level margin to carry it, as set out above.

An option seller (writer) pays futures-level margin to enter, far above the premium received. The seller’s margin is the SPAN margin plus the exposure margin on the equivalent futures position, because the writer carries the obligation to deliver the futures position if the option is exercised against them. The extreme loss margin on commodity options is levied at 1 per cent of the open position. This is the naked option selling margin framework applied to commodities. The structure of these margin layers is in SPAN margin on Zerodha and exposure margin on Zerodha .

SEBI’s peak-margin framework requires the full margin upfront for both intraday and overnight option-writing positions, so there is no thin intraday margin on a sold commodity option.

Trading costs and tax

Commodity options, as non-agricultural commodity derivatives, attract Commodity Transaction Tax . CTT on the sale of a commodity option is levied on the option premium; on a devolved option that converts into a futures position, CTT applies to the futures leg, computed as the settlement price times the lots times the lot size times the futures CTT rate. STT does not apply to commodity derivatives. Brokerage on Zerodha is Rs 20 or 0.03 per cent of turnover, whichever is lower, per order, plus the MCX transaction charge, the SEBI turnover fee, GST at 18 per cent, and stamp duty. The full computation is in Zerodha commodities and Zerodha commodity brokerage , and the income-tax treatment in F&O taxation in India .

The practical checklist before expiry

A commodity options trader has three things to settle before an expiry. Decide whether to square off the option or let it devolve; an option held purely for the premium move should be closed before the CTM cut, not carried. If devolvement is intended, confirm the account holds futures-level margin by the broker’s cutoff, because an unfunded option is squared off rather than devolved. And check the specific option expiry date, especially on crude oil and natural gas, where the option expires about two business days before the future. The devolvement mechanic is not a penalty; it is the design of an option on a future, and it is manageable once the margin and the expiry timing are understood.

See also

• Multi Commodity Exchange (MCX)
• Futures and options
• How to read option Greeks on Kite
• Natural gas futures on MCX via Zerodha
• Bullion mini contracts on Zerodha
• Crude oil futures
• Gold futures
• Energy futures margins on Zerodha
• How long MCX contracts can be held
• SPAN margin on Zerodha
• Exposure margin on Zerodha
• Naked option selling margin on Zerodha
• Zerodha margin calculator
• Zerodha commodity segment
• Zerodha commodities
• Zerodha commodity brokerage
• Zerodha MCX membership
• Commodity Transaction Tax
• F&O taxation in India
• How to handle commodity physical delivery risk on Zerodha
• How to trade crude oil futures on MCX via Zerodha
• How to trade gold mini futures on Zerodha
• Kite, Zerodha’s trading platform
• SEBI Investment Management Department
• 90 per cent of retail F&O traders lose money: SEBI study

External references

• MCX options product page
• MCX contract specifications
• SEBI commodity derivatives circulars
• Zerodha support: what is devolvement for a commodity option
• Zerodha margin calculator

References

1. MCX Contract Specifications: Options on Gold, Silver, Crude Oil and Natural Gas futures, Multi Commodity Exchange of India Ltd, mcxindia.com.
2. SEBI Circular SEBI/HO/CDMRD/DMP/CIR/P/2021/020, Margining framework for commodity derivatives, Securities and Exchange Board of India.
3. SEBI Master Circular for Commodity Derivatives, Securities and Exchange Board of India.
4. Finance Act 2013, Chapter VII, Commodity Transaction Tax, Ministry of Finance, Government of India.
5. Zerodha support, Commodity option devolvement and expiry settlement, support.zerodha.com.