Why is CTT higher on options than on commodity futures?

Commodity Transaction Tax on a non-agri option is 0.05% of the premium, charged to the seller only, versus 0.01% of contract value on a futures trade — a five-fold difference that mirrors the same asymmetry between equity options and equity futures. Because CTT is levied on premium rather than on the full notional, the rupee amount is usually modest, and the seller can deduct it as a business expense under Section 36. Agricultural commodity derivatives are exempt from CTT altogether, though they remain non-speculative for tax.

Conceptual · Article 8.3.2

Commodity Options.

The Right to Hedge, Priced as a Premium — and Settled in Futures.

Published as on 15 July 2026

A commodity option is an exchange-traded contract that gives the buyer the right, but not the obligation, to take a position in a commodity — a jeweller capping the price it pays for gold, a farmer locking a floor under a harvest. But on Indian bourses these are options on futures, not on spot: they are priced with the Black 76 model and, at expiry, an in-the-money option does not simply pay cash — it devolves into a futures position at the strike. The buyer's loss is capped at the premium with no margin to post; the writer takes the larger, margined risk. India's first commodity options — MCX Gold — launched on Dhanteras, 17 October 2017, and Crude Oil Mini and Natural Gas Mini contracts followed in April 2024.

On Futures

Underlying, Not Spot

Oct 2017

First MCX Gold Option

Premium Only

Buyer's Max Loss

Slab · 43(5)(e)

Tax · Non-Speculative

Executive Summary · Page 2

Executive Summary · 6 Findings

A commodity option answers a producer's or user's real question: how do I protect myself against an adverse price move without giving up the good move — and without funding daily margin calls? Pay a premium, and the downside is capped while the upside stays open. The Indian catch is structural: exercise an in-the-money option here and you do not pocket cash — you inherit a futures position. Understanding that devolvement mechanic is the difference between a clean hedge and an accidental delivery obligation.

Covers what a commodity option is and why it is an option on futures; the Black 76 pricing model; MCX and NCDEX contract specifications and expiry timing; the devolvement mechanism, CTM (Close-to-Money) strikes and devolvement margin; worked payoffs for a jeweller's gold call and a farmer's soybean put; how buyer and writer differ on margin and risk; the CTT and cost structure; non-speculative business-income taxation under Section 43(5)(e); and six questions Indian hedgers ask.

Key Findings

Options on futures, not on spot.

A commodity option gives the buyer the right, not the obligation, to buy (call) or sell (put) at a strike price. On MCX and NCDEX the underlying is the commodity futures contract, not the physical spot — the international norm. That single fact drives everything: the pricing model, the settlement mechanism, and the risks that follow.

Priced with Black 76, not Black-Scholes.

Because the underlying is a futures price, standard commodity options use the Black 76 model, which takes the futures price as its input and adjusts discounting accordingly. Contango, backwardation, storage costs and convenience yield are already baked into that futures price — so Black 76, not Black-Scholes, is the correct engine.

At expiry, options devolve into futures.

An in-the-money option does not cash-settle directly. It devolves: a long call becomes a long futures position at the strike, a long put a short futures — opened at the Daily Settlement Price, with intrinsic value settled as mark-to-market. The holder then sits in the futures market, with all its obligations, including possible physical delivery for bullion.

CTM strikes decide who acts.

MCX's Close-to-Money band is the ATM strike plus two either side — five strikes. Deeper in-the-money options auto-devolve unless the holder files a contrary instruction (Do Not Exercise); CTM options devolve only on explicit instruction, else they lapse. Short holders cannot opt out, and CTM options can carry higher devolvement margin.

The buyer posts no margin — only premium.

An option buyer's maximum loss is the premium, with no initial or daily mark-to-market margin. The writer carries the larger, open-ended risk and must post margin. For a farmer or small jeweller who cannot fund daily margin calls, this is the difference between being able to hedge and not hedging at all.

Non-speculative business income at slab.

Gains are non-speculative business income under Section 43(5)(e), taxed at your slab rate — like commodity futures. Losses set off against most heads (not salary) and carry forward eight years; ITR-3 is required and Section 44AB audit may apply. CTT is 0.05% of premium on the sell side for non-agri contracts; agri options are CTT-exempt.

At A Glance

Metric	Value	Detail
Underlying	Futures	Not spot price
Exchanges	MCX / NCDEX	SEBI-regulated
Style	European	Exercise at expiry
Pricing model	Black 76	Futures as input
Buyer margin	None	Premium only
Settlement	Devolvement	Into futures
Tax	Slab · 43(5)(e)	Non-speculative
Best use	Hedging	Cap downside for a premium

Exhibit 01: Option Buyer vs Futures Position

Feature	Option Buyer	Futures
Max loss	Premium	Open-ended
Margin	None	Initial + MTM
Payoff	Asymmetric	Linear
Upside kept	Yes	No

Illustrative, FY 2025-26. The option buyer trades a known, upfront cost (the premium) for protection while keeping the favourable move; the futures hedger locks the rate symmetrically and must fund daily margin. For a liquidity-constrained hedger, the no-margin feature of the bought option is decisive.

The Opening · Page 3

The Opening

A commodity option is the cleanest instrument a hedger can hold: for a one-time premium, it buys the right — never the obligation — to transact at a fixed price on a fixed date. A jeweller worried gold will rise buys a call and caps its cost; a farmer worried the harvest price will fall buys a put and sets a floor. If the feared move never comes, the option simply lapses and the hedger transacts at the better market price, out only the premium. That asymmetry — bounded loss, open upside — is the whole appeal.

"Buy a commodity option in India and you are not buying a cash payout. You are buying the right to be dropped into the futures market at a price of your choosing. Exercise it, and a call becomes a long future, a put a short future — the option was only ever a ticket to a futures position."
Options On Futures, Not On Spot

The mechanics. Because the underlying is the exchange's futures contract rather than the physical spot, the option is priced with the Black 76 model — the futures price is the input, so contango, backwardation, storage and convenience yield are already embedded. And settlement is not a direct cash transfer. At expiry an in-the-money option devolves into a futures position at the strike, opened at the Daily Settlement Price, with the intrinsic value settled as mark-to-market. From that instant the holder carries a futures contract, with its margin and — for bullion and agri standard contracts — its potential physical delivery.

The FY 2025-26 context. India came late to commodity options: exchanges offered only futures until SEBI cleared the way, and MCX launched Gold options on Dhanteras, 17 October 2017. The suite has since widened to silver, crude oil, natural gas, copper, zinc and nickel, with Crude Oil Mini and Natural Gas Mini added on 23 April 2024 to reach smaller hedgers. NCDEX runs options on select agricultural commodities for farmers and FPOs.

The Honest Boundary: A commodity option is NOT a lottery ticket for a directional punt — most retail derivatives traders lose money. It is NOT free of the futures market — exercise devolves you into it. It is NOT identical to an equity option — the underlying, the pricing model and the settlement all differ. It IS a precise, margin-light way for a genuine hedger to cap an adverse price move while keeping the favourable one, provided the devolvement mechanic is understood before expiry, not after.

Structure

Part I

What a Commodity Option Is, Why It's On Futures & Its Specs

Part II

Devolvement, CTM Strikes & Devolvement Margin

Part III

Payoffs, Options vs Futures, Cost, CTT & Tax

Part IV

The Verdict: A Hedger's Tool, Used Deliberately

Use If

✓ You have real price exposure to hedge

✓ You want downside capped, upside kept

✓ You cannot fund daily margin calls

✓ You understand devolvement into futures

Do NOT Use If

✕ You are taking a leveraged directional bet

✕ You cannot absorb a total premium loss

✕ You are unprepared for delivery obligations

✕ You are writing options without capital

Part I

What a Commodity Option Is, Why It Sits on Futures, and How the Contracts Are Built

The right-not-obligation payoff and the premium that buys it; why India's contracts are options on futures priced with Black 76; and the MCX and NCDEX specifications — lot sizes, European style, and the expiry timing that keeps hedgers clear of the delivery window.

Part I · Page 4

MCX Contracts — A Sample

Commodity	Lot Size	Style
Gold	1 kg	European
Gold Mini	100 g	European
Silver	30 kg	European
Crude Oil	100 barrels	European
Crude Oil Mini	10 barrels	European
Natural Gas	1,250 MMBtu	European
Copper / Zinc / Nickel	As per futures	European

All MCX commodity options are European-style — exercisable only at expiry. The underlying in each case is the corresponding MCX futures contract. Crude Oil Mini and Natural Gas Mini options, launched 23 April 2024, opened access to smaller hedgers who previously had to use full-size crude (100 barrels) or gas (1,250 MMBtu) lots.

Why It's an Option on Futures

The Defining Feature

The underlying is the futures contract, not the physical spot. Two consequences follow. First, pricing uses the Black 76 model — the futures price is the input, so the forward structure of the commodity market (contango, backwardation, storage, convenience yield) is already embedded. Second, exercise settles by devolvement into a futures position, not a direct cash payout. Together these make commodity options behave unlike equity or currency options.

Expiry Timing

Category	Option Expires
Bullion & base metals	3 business days before tender delivery
Energy (crude, gas)	2 business days before futures expiry

Options expire before the tender delivery period of the underlying futures. The timing is deliberate: a devolved bullion position can still be closed before the mandatory delivery window opens, giving holders a brief exit before facing physical delivery.

NCDEX agricultural options: NCDEX offers options on select agri commodities — soybean, mustard seed and others — used primarily by farmers, Farmer Producer Organisations (FPOs) and agri-processors for downside price protection. Settlement follows the physical delivery framework of the underlying agricultural futures. These contracts are CTT-exempt, yet have been treated as non-speculative for tax since 1 April 2019.

A Milestone, Late in Arriving

Before 2017, Indian commodity exchanges offered only futures. SEBI's introduction of options — MCX Gold, launched by the Finance Minister on Dhanteras, 17 October 2017 — was a landmark in deepening the commodity derivatives market, giving hedgers an instrument with capped, margin-free downside for the first time.

Part II

Devolvement, CTM Strikes and the Margin That Comes Before Expiry

Why an exercised option becomes a futures position rather than a cheque; how MCX's Close-to-Money band flips the burden of action between deep-ITM and marginal holders; and why the exchange charges a devolvement margin two days before expiry to fund the exposure that is about to appear.

Part II · Page 6

How Devolvement Works

Option Position	Becomes
Long Call (ITM)	Long Futures at strike
Long Put (ITM)	Short Futures at strike
Short Call (assigned)	Short Futures at strike
Short Put (assigned)	Long Futures at strike

At expiry, the in-the-money option produces no direct cash payout. The devolved futures position is opened at the Daily Settlement Price (DSP), and the intrinsic value — the gap between strike and DSP — is settled as mark-to-market. Those futures then follow standard rules: compulsory physical delivery for MCX gold and silver standard contracts, cash settlement for crude oil and natural gas. Devolvement has no direct equivalent in equity or currency options.

Devolvement Margin — Funded Before Expiry

Two business days before expiry, MCX charges an additional devolvement margin on all open ITM positions, ensuring holders are prepared for the futures exposure to come. It must be funded by T+1; brokers may auto-square-off positions if it is not maintained. Counterintuitively, CTM options carry higher devolvement margin than deep-ITM ones — the exchange cannot predict whether CTM holders will opt in or out, and that uncertainty raises the requirement.

CTM — Close-to-Money Strikes

The Band: ATM ± 2 Strikes

MCX's Close-to-Money band is the at-the-money strike plus the two strikes immediately above and two below — five strikes in all. It exists to protect holders of marginally in-the-money options from being pushed into futures delivery obligations for a small sliver of intrinsic value.

Moneyness	Devolvement Rule
Deep ITM	Auto-devolves unless contrary instruction (DNE)
CTM (ATM ± 2)	Devolves only on explicit instruction
OTM	Expires worthless

The burden of action flips. Deep-ITM holders must actively opt out (a Do-Not-Exercise contrary instruction) to avoid devolvement; CTM holders must actively opt in to trigger it, or the option lapses. Crucially, the DNE facility is available only to long holders — short holders cannot place a contrary instruction and are assigned automatically if the long counterpart exercises.

Why this matters to a hedger: decide your intention before expiry, not after. If you want the futures exposure (or physical), let a deep-ITM option devolve. If you only wanted intrinsic value and not a delivery obligation, square off the option in the market before expiry, or manage the instruction correctly. Passivity has different consequences on either side of the CTM band.

Part III

Payoffs, Options versus Futures, and the Cost of Carrying the Hedge

A jeweller's gold call and a farmer's soybean put, worked through in rupees; why the buyer's capped, margin-free loss beats a futures hedge for the liquidity-constrained; and the CTT and tax frame — 0.05% sell-side CTT and non-speculative business income under Section 43(5)(e).

Part III · Page 8

Gold Call — Jeweller Hedge

The Setup

A jeweller must procure 1 kg of gold in six weeks for a confirmed export order. MCX Gold Futures = ₹75,000/10g. It buys a 1-kg call at strike ₹75,000, premium ₹500/10g. Total premium: ₹50,000 — and that is the maximum loss. No margin is posted.

At Expiry	Outcome
Gold → ₹80,000	Call devolves to long future; intrinsic ₹5,00,000; net gain ₹4,50,000
Gold → ₹72,000	Call lapses; lose ₹50,000 premium; buy cheaper gold in market

If gold rises, the call caps the effective procurement price near ₹75,000/10g. If gold falls, the jeweller keeps the full benefit of cheaper metal, out only the premium — an advantage a symmetric futures hedge cannot offer.

Soybean Put — Farmer Hedge

Price Insurance at Harvest

An MP soybean FPO sows in June with NCDEX October futures at ₹4,500/quintal and buys ₹4,500 puts. If soybean crashes to ₹3,800, the ITM put devolves into a short future at ₹4,500 — a floor holds. If it rises to ₹5,200, the put lapses and the crop sells higher in the market; only the premium is foregone. One premium payment guarantees a minimum price without capping the upside.

Options (Buyer) vs Futures

Feature	Option Buyer	Futures
Max loss	Premium	Open-ended
Margin	None	Initial + MTM
Payoff	Asymmetric	Linear
Favourable move	Retained	Locked away
CTT (sell side)	0.05% premium	0.01% value

The absence of margin for buyers is the single biggest practical advantage for farmers and small hedgers: no daily margin-call risk, only the upfront premium to fund. For limited-liquidity hedgers, that is the line between hedging and not hedging at all.

Cost & CTT

CTT — Seller Pays, Buyer Doesn't

CTT on a non-agri option is 0.05% of premium, on the sell side only — five times the 0.01% futures rate, mirroring the equity options-vs-futures asymmetry. It is levied on premium, not notional, so the rupee amount is usually modest, and is deductible as a business expense under Section 36. Agricultural options are CTT-exempt. STT does not apply; exchange, SEBI, stamp and GST charges do.

Tax — Section 43(5)(e)

Income is non-speculative business income, taxed at slab. Premium received by a writer is income; premium lost on a worthless bought option is a business loss; devolved futures P&L is also non-speculative. Losses set off against most heads (not salary) and carry forward eight years. ITR-3 is required, Section 44AB audit may apply, and turnover follows ICAI guidance. NCDEX agri options are non-speculative from 1 April 2019.

Part IV

The Verdict

A hedger's insurance. Not a punter's lottery ticket.

Part IV: The Verdict · Page 10

30-Second Summary

A commodity option is an exchange-traded contract giving the buyer the right, not the obligation, to transact at a strike price — for a one-time premium that is also the buyer's maximum loss, with no margin to post. On MCX and NCDEX these are options on futures, priced with the Black 76 model, and at expiry an in-the-money option devolves into a futures position at the strike (opened at the Daily Settlement Price, intrinsic value settled as MTM) rather than paying cash. That devolvement can carry into physical delivery for bullion and agri contracts.

MCX's CTM band (ATM ± 2 strikes) governs who must act at expiry: deep-ITM options auto-devolve unless a contrary instruction is filed; CTM options devolve only on explicit instruction. A devolvement margin is charged two days before expiry. CTT is 0.05% of premium on the sell side for non-agri contracts; agri options are exempt. Gains are non-speculative business income under Section 43(5)(e), taxed at slab, with eight-year carry-forward and possible Section 44AB audit. Used as a hedge, the instrument is powerful; used as a leveraged directional bet, it is where most retail traders lose.

"The premium answers one question — what is the most I can lose to protect this exposure? A known, small number. Devolvement answers the other — what happens if I'm right? You inherit a futures position, with everything that entails. A commodity option is the safest way for a genuine hedger to cap a price move. It is one of the faster ways for a punter to lose a premium. Confusing the two is the only real mistake."
The Final Orientation

The Bottom Line: Use commodity options to hedge real exposure — a jeweller's procurement, a farmer's harvest, a processor's input cost — where capped, margin-free downside and retained upside are worth a premium. Know before expiry whether you want the futures exposure devolvement creates, and manage your CTM instruction accordingly. Budget for the 0.05% sell-side CTT if you write, and for slab-rate non-speculative taxation with ITR-3 and a possible audit. Above all, size positions to a hedge, not a bet: derivatives are leveraged, and most retail F&O traders make net losses. Verify current contract specs on the MCX and NCDEX websites before trading.

ADWIZR · July 2026

Decision Rules

Use Correctly As

✓ Price insurance on real exposure

✓ Capped downside, retained upside

✓ A margin-light hedge for the illiquid

✓ A planned entry into a futures position

Misuse Destroys Value

✕ A leveraged directional gamble

✕ Naked writing without capital

✕ Ignoring devolvement at expiry

✕ Premium you cannot afford to lose

Three Misconceptions

What Hedgers Get Wrong

(1) "Exercise means cash in hand." No — an ITM option devolves into a futures position, not a payout. (2) "A marginally ITM option always pays." Within the CTM band it lapses unless you give an explicit instruction. (3) "Options are cheaper leverage than futures." As a hedge they are efficient; as a directional bet, time decay erodes the premium and most retail traders lose.

vs Commodity Futures

Asymmetric & Margin-Free vs Linear & Margined

Option buyer: loss capped at premium, no margin, upside retained, payoff asymmetric. Futures: loss open-ended, initial plus daily margin, rate locked symmetrically, payoff linear. Both settle around the same futures market — but the risk profiles are opposite ends of the spectrum.

Premium

Buyer max loss

No margin posted

Devolve

At expiry

Into futures at strike

Slab

43(5)(e) tax

Non-speculative

Investor FAQ

Questions Indian Hedgers Ask

Six questions, answered directly.

Investor FAQ · Page 12

Frequently Asked Questions

Q1 How are commodity options different from equity options?

On Indian exchanges, commodity options are options on futures, not on the spot price. Two things follow. First, they are priced with the Black 76 model, which takes the futures price as its input, so contango, backwardation, storage costs and convenience yield are already embedded. Second, they settle by devolvement: an in-the-money option at expiry converts into a futures position at the strike, opened at the Daily Settlement Price, rather than paying cash directly. Equity options simply cash-settle against the stock — commodity options drop you into the futures market.

Q2 What happens when my commodity option expires in-the-money?

It devolves. A long call becomes a long futures position at the strike, a long put becomes a short futures position — both opened at the Daily Settlement Price, with the intrinsic value settled as mark-to-market. From that moment you hold a futures contract with all its obligations, including possible physical delivery for MCX gold and silver standard contracts. That is why the exchange charges a devolvement margin two business days before expiry, and why holders should decide in advance whether they want the futures exposure or intend to square off.

Q3 Do I have to post margin to buy a commodity option?

No. As an option buyer you pay only the upfront premium — there is no initial margin and no daily mark-to-market margin call while you hold the option. Your maximum loss is the premium. The writer (seller) is the one who posts and maintains margin and carries the larger, open-ended risk. This absence of margin for buyers is the single biggest reason commodity options suit farmers and small hedgers who cannot fund daily margin calls on a futures position.

Q4 What are CTM (Close-to-Money) strikes and why do they matter?

CTM is an MCX safeguard covering the at-the-money strike plus the two strikes immediately above and two below it — five strikes in all. For strikes deeper in-the-money than the CTM band, options auto-devolve into futures unless the holder files a contrary instruction (Do Not Exercise). Within the CTM band the logic reverses: the option devolves only if the holder gives an explicit instruction, otherwise it expires worthless. The design stops holders of marginally in-the-money options from being pushed into futures delivery obligations for a small sliver of intrinsic value. Note that CTM options can carry higher devolvement margin, and short holders cannot file a contrary instruction.

Q5 How are commodity options taxed in India?

Income from commodity options is non-speculative business income under Section 43(5)(e) of the Income Tax Act, taxed at your slab rate — the same treatment as commodity futures. Premium received by a writer is business income; premium lost on a worthless bought option is a business loss; and profit or loss on any devolved futures position is also non-speculative. Losses can be set off against most heads (except salary) and carried forward for eight years. CTT paid is deductible under Section 36, ITR-3 is required, and a Section 44AB tax audit may apply depending on turnover. NCDEX agricultural options have been non-speculative since 1 April 2019 regardless of their CTT exemption.

Q6 Can a farmer or a small jeweller actually use these to hedge?

Yes — that is precisely their purpose. A jeweller with a confirmed export order can buy a gold call to cap the price at which it will procure metal, paying only a premium; if gold falls, the call lapses and it buys cheaper. A farmer or FPO can buy a put on NCDEX to lock a price floor at harvest; if prices rise, the put lapses and the crop sells higher in the market. In both cases the option acts as one-time price insurance: downside is protected, upside is retained, and there are no daily margin calls. The launch of Crude Oil Mini and Natural Gas Mini options in April 2024 extended this access to smaller energy hedgers.

Key Terms & Definitions

Commodity Option

An exchange-traded contract giving the buyer the right, not the obligation, to buy (call) or sell (put) a commodity futures contract at a strike price on the expiry date, in exchange for a premium. Traded on MCX and NCDEX; the writer takes the corresponding obligation and posts margin.

Option on Futures

A commodity option whose underlying is the corresponding futures contract, not the physical spot price. This is the international norm and the reason Indian commodity options are priced with Black 76 and settle by devolvement into a futures position.

Devolvement

The conversion of an exercised in-the-money option into a futures position at the strike, opened at the Daily Settlement Price with intrinsic value settled as mark-to-market. A long call becomes long futures; a long put, short futures. It replaces the direct cash settlement seen in equity options.

Black 76 Model

The pricing model for options on futures. It uses the futures price — not the spot price — as the underlying input and adjusts discounting accordingly, so the forward structure of the commodity market is automatically embedded.

CTM (Close-to-Money) Strikes

The MCX band of the ATM strike plus two strikes either side — five in all. CTM options devolve only on explicit instruction; deeper-ITM options auto-devolve unless a contrary instruction is filed. Designed to shield marginally ITM holders from unwanted delivery obligations.

CTT (Commodity Transaction Tax)

A transaction tax on non-agri commodity derivatives. On options it is 0.05% of premium, charged to the seller only, versus 0.01% of contract value on futures. Deductible as a business expense under Section 36; agricultural derivatives are exempt.